Professional Advice & Insights

At The Nery Corporation, we know that selling a business, accurately valuing a company, and completing a merger or acquisition, is complicated. These articles are useful for understanding the steps that go into a successful transaction and will familiarize you with many aspects of the process. If you would like to discuss any of these resources further, please don't hesitate to contact us.

5 Key Factors in Transferring Your Business to a Family Member

September 5, 2018

Kevin A. Nery, CBB, CBI, M&AMI


5 Key Factors in Transferring Your Business to a Family Member

The odds are that you've put a great deal of yourself into your business. Inevitably, the day will come when you have no choice but to walk away from your business and begin a new chapter of your life. Quite often, businesses are transferred from one family member to another. In this article, we will examine 5 of the key factors you'll want to consider when transferring your business to a family member.

Factor #1 Gifting Can Have Numerous Benefits

Will you be selling your business to a family member or simply gifting that business? Gifting comes with several major advantages, for example, this approach can reduce your real estate taxes. Also, the gifting process can allow you to maintain a level of control if the agreement is written properly.

Factor #2 The Buy-Sell Agreement

Don't overlook the importance of the buy-sell agreement, which works to put everything in writing. You may be tempted to forgo a contract since you are dealing with a family member, but this is a mistake, no matter how close you might be with your loved ones. A buy-sell agreement adds clarity to the process, which can help to keep confusion levels low and the chances of success high. When the time comes to transfer your business to a relative, you'll want an expert to create a document that outlines all relevant details. It should feature everything from the value of the business and the amount being paid for the business to who will be kept on the payroll to what level of involvement you'll have once the process is finished.

Factor #3 Seller Financing

Seller financing is quite common among sellers, and when relatives are involved it becomes even more common. One option is to consider a private annuity. A private annuity allows for payments to be spread out for many years and can even extend until the end of your life.

Factor #4 Considering the Self-Cancelling Installment Note

In the installment note, it is possible to feature a self-cancelling clause, which can definitely benefit your family in the future. This part of the paperwork will confirm that if you were to pass away before all the payments have been made, the remaining debt can be attached directly to your will. If you are a parent selling a business to a child, then one of the key benefits of an installment note is that it keeps your other children from paying excess income tax on your estate.

Factor #5 Transferring a Business to a Relative and the IRS

You can expect the IRS to take a second look when you sell a business to a family member. The IRS does this to make sure that everything is above board, due to the fact that many past business owners have acted in an unethical manner. You'll want to be very sure that every aspect of the sale is done professionally and that you have all your paperwork in order.

A business broker can help you deal the unique particulars that come along with selling a business to a relative. Every business is different, and every sale is different too. A professional business broker can help you avoid common mistakes and pitfalls.

Copyright: Business Brokerage Press, Inc.

Photo Credit: aslysun/BigStock.com

Maintaining Confidentiality Throughout the Sale Process

August 28, 2018

Kevin A. Nery, CBB, CBI, M&AMI


Maintaining Confidentiality Throughout the Sale Process

There are two key ingredients when it comes to selling a business: professionalism and confidentiality. If either of these two ingredients are lacking, then you'll most likely run into problems. Sadly, many sellers see their deals fall apart due to a breach of confidentiality. You certainly don't want to be among their ranks.

The simple fact is that a breach in confidentiality can negatively impact everyone from suppliers and vendors to creditors. For example, vendors could change their terms and this, in turn, could have a major, negative impact on cash flow. There can be a chain reaction of events that spirals out of control.

The potential negative outcomes of a breach in confidentiality are quite numerous, for example, employees and customers alike could begin to worry about the future of the business. Employees could begin to worry about the safety of their jobs and begin looking for a new position. Dangerously, this situation could lead to changes in management and the loss of key employees. Likewise, customers, fearing instability with the business, could also decide to take the business elsewhere, leading to revenue problems.

Yet another complicating factor comes in the form of the competition. If the competition hears that your business is up for sale, they could sense blood in the water and look to steal your customers.

Ultimately, a breach could give potential buyers cold feet. At this point, it should be very clear that protecting confidentiality is a must. One of the single best ways to ensure that confidentiality is maintained is to opt for an experienced and proven business broker. Business brokers understand the simply tremendous value of keeping things under wraps.

It may be tempting to try and sell your business on your own, but it is vital to understand that doing so can damage your businesses' reputation. A good business broker knows how to shield your business from breaches of confidentiality. By working with a business broker, not only are confidentiality agreements signed and taken seriously, but also you'll know that prospective buyers are vetted and fully pre-qualified. According to an article on Inc.com, broker feedback has revealed 9 out of 10 interested parties who respond to "business for sale" ads are not qualified to make the purchase. Why would you want to risk giving away key details to these parties?

In short, you'll have a much better idea of who you are dealing with and how serious they are about buying your business. At the end of the day, there is no replacement for maintaining confidentiality.

Copyright: Business Brokerage Press, Inc.

Photo Credit: tashatuvango/BigStock.com

Key Elements for Every Partnership Agreement

August 7, 2018

Kevin A. Nery, CBB, CBI, M&AMI

Key Elements for Every Partnership Agreement

You should never forget that your partnership agreement is, in fact, one of the most important business documents you will ever sign. Many people go into business with loved ones, relatives or lifelong friends only to discover (once it's too late) that they should have had a partnership agreement. A partnership agreement protects everyone involved and can help reduce problems that may arise. Outlining what will happen during different potential situations and events in a legal framework can help your business keep running smoothly.

What Should Be in a Partnership Agreement?

Every business is, of course, different; however, with that stated, any partnership should outline, with as much clarity as possible, the rights and responsibilities of all involved. A well written and carefully considered partnership agreement will keep small problems and disagreements from evolving into more elaborate and serious concerns.

There are times to take a DIY approach and then there are times when you should always opt for a professional. When it comes to partnership agreements, it is best to opt for working with a lawyer. Finding competent legal help for drafting your partnership agreement is simply a must.

What is Typically Addressed in a Partnership Agreement?

In theory, a partnership agreement can cover a wide-array of factors. Here are a few points typically addressed in partnership agreements:

  1. Who is contributing funds to get the business operational?
  2. What percentage will each partner receive?
  3. Who will be in charge of managerial work?
  4. Which partner(s) are to receive a draw?
  5. How is money to be distributed?
  6. What must be done in order to bring in new partners?
  7. What happens in the event of the death of a partner?
  8. How will the business be valued?
  9. How will a buy out be executed?
  10. How are business decisions made? Are decisions made by a unanimous vote or a majority vote?
  11. If a conflict cannot be resolved, when must the conflict be resolved in court?

Thanks to partnership agreements, all partners involved can proceed and start a new business with fewer areas of concern. The simple fact is that without a partnership agreement, your business can face a range of disruptions; these would be disruptions that could ultimately spell doom for your business.

Copyright: Business Brokerage Press, Inc.

Photo Credit: Freedom TumZ/BigStock.com

Examining the Mind of the Serious Buyer - 5 Points to Consider

June 15, 2018

Kevin A. Nery, CBB, CBI, M&AMI


Examining the Mind of the Serious Buyer - 5 Points to Consider

Are you looking for a way to perfect your presentation? Understanding what the typical serious buyer wants will help you get your business ready for selling.

Let's turn our attention to looking at what these types of individuals and entities really want. After all, your time is precious.

1. An Interest in the Industry

First, prospective buyers will want to have a better understanding of your industry. Any serious buyer will want to understand the industry as a whole, as well as your existing customers, prospective customers and the strengths and weaknesses of your business. Key factors, such as threats from competition, will also be a major factor for prospective buyers.

2. Seeking Knowledge about Discretionary Costs

Secondly, expect buyers to take a long look at discretionary costs. Sellers will often look to reduce their expenses in a range of discretionary areas including advertising, research and development and public relations; this is done to help make a business appear more attractive to a buyer. However, it is important to note, that a savvy prospective buyer will notice reduction in discretionary expenses.

3. Inquiries about Wages and Salaries

Wages and salaries is another area that receives attention from buyers. If your business is paying minimum wage or offers a limited retirement program then employee turnover is likely to be high. Buyers may be concerned that employee stability may be low, which, of course, can potentially disrupt business.

4. Questions about Cash Flow and Inventory

No serious buyer will ignore the issue of cash flow. Any prospective buyer will want to know that the business they are considering buying will continue to generate profits both now and in the future.

Inventory is another area that will not be ignored. If your business is carrying a large amount of antiquated, unsalable or simply unusable inventory, then expect that to be factored into a prospective buyer's decision-making process. It is best to disclose such inventory instead of hiding it, as it will be discovered during due diligence.

5. Seeking Capital Expenditure Details

Finally, capital expenditures will be examined by buyers. You can expect buyers to carefully evaluate machinery and equipment to ensure that there will be no expensive surprises looming on the horizon.

These give areas are definitely not the only areas that buyers will explore and investigate. Everything from financial agreements and environmental concerns to government control will be examined in depth. You should invest some time thinking about the situation from the perspective of a buyer, as this will help you discover many potential problems and try to secure viable workarounds. Working closely with a business broker is another way to ensure that you can successfully anticipate the needs of buyers.

Copyright: Business Brokerage Press, Inc.

Photo Credit: Sushytska/BigStock.com

Don't Let the Dust Settle on Your Lease: 8 Factors to Consider

May 15, 2018

Kevin A. Nery, CBB, CBI, M&AMI


Your Deal is Almost Done, Then Again, Maybe Not

Owners often neglect understanding their leases and this can be problematic. If your business is location-sensitive, then the status of your lease could be of paramount importance. Restaurants and retail businesses, for example, are usually location-dependent and need to pay special attention to their leases. But with that stated, every business should understand in detail the terms of its leases.

There are many key factors involving leases that should not be ignored or overlooked. If you adhere to these guidelines, you'll be much more likely to control your outcomes.

  1. At the top of the list is the factor of length. Usually, the longer your lease the better.
  2. Secondly, if the property does become available, then it is often in an owner's best interest to try and buy the property or he or she may be forced to move.
  3. When negotiating a lease, it is best to negotiate a way out of the lease if possible; this is particularly important for new businesses where the fate of your business is still an unknown. Experts recommend opting for a one-year lease with a long option period.
  4. You may want to sell your business at some point, and this is why it is important to see if your landlord will allow for the transfer of the lease and what his or her requirements are for the transfer.
  5. Look at the big picture when signing a lease. For example, what if your business is located in a shopping center? Then attempt to have it written into your lease that you're the only tenant that can engage in your type of business.
  6. If you're located in a shopping center, then try to outline in your agreement a reduction of your rent if an anchor store closes.
  7. Your lease should detail what your responsibilities are and what responsibilities your landlords hold. Keep in mind that if you are a new business, it is quite possible that your landlord will likely require a personal guarantee from you, the owner.
  8. The dollar amount is necessarily the most important factor in determining the quality of your lease. It is important to carefully assess every aspect of the lease and understand all of its terms.

There are many other issues that should be taken into consideration when considering a lease.

  • For example, what happens in the event of a natural disaster or fire? Who will pay to rebuild?
  • Is there a percentage clause and, if so, is that percentage clause reasonable?
  • How are real estate taxes, grounds-keeping fees and maintenance fees handled?

Investing the time to understand every aspect of your lease will not only save you headaches in the long run, but it will also help to preserve the integrity of your business.

Copyright: Business Brokerage Press, Inc.

Your Deal is Almost Done, Then Again, Maybe Not

April 24, 2018

Kevin A. Nery, CBB, CBI, M&AMI


Your Deal is Almost Done, Then Again, Maybe Not

Having a letter of intent signed by both the buyer and the seller can be a very good feeling. Everything can seem as though it is moving along just fine, but the due diligence process must still be completed. It is during due diligence that a seller decides whether he or she is going to finalize the deal. Much depends on what is discovered during this important process, so remember the deal isn't done until it is truly finalized.

In his book, The Art of M&A, Stanley Forster Reed noted that the purpose of due diligence is to "Assess the benefits and liabilities of a proposed acquisition by inquiring into all relevant aspects of the past, present and predictable future of the business to be purchased."

Summed up another way, due diligence is quite comprehensive. It probably comes as no surprise that this is when deals often fall apart. Before diving in, it is critically important that you meet with such key people as appraisers, accountants, lawyers, a marketing team and other key people.

Let's take a look at some of the main items that both buyers and sellers should have on their respective checklists.

Industry Structure

You should determine the percentage of sales by product line. Additionally, take the time to review pricing policies, product warranties and check against industry guidelines.

Human Resources

Review your key people and determine what kind of employee turnover is likely.

Manufacturing

If your business is involved in manufacturing then every aspect of the manufacturing process must be evaluated. Is the facility efficient? How old is the equipment? What is the equipment worth? Who are the key suppliers? How reliable will those suppliers be in the future?

Trademarks, Patents and Copyrights

Trademarks, patents and copyrights are intangible assets and it is important to know if those assets will be transferred. Intangible assets can be the key assets of a business.

Operations

Operations is key, so you'll want to review all current financial statements and compare those statements to the budget. You'll also want to check all incoming sales and at the same time analyze both the backlog and the prospects for future sales.

Environmental Issues

Environmental issues are often overlooked, but they can be very problematic. Issues such as lead paint and asbestos as well as ground and water contamination can all lead to time-consuming and costly fixes.

Marketing

Have a list of major customers ready. You'll want to have a sales breakdown by region and country as well. If possible, you'll want to compare your company's market share with that of the competition.

The Balance Sheet

Accounts receivable will want to check for who is paying and who isn't. If there is bad debt, it is vital to find that debt. Inventory should also be checked for work-in-progress as well as finished goods. Non-usable inventory, the policy for returns and the policy for write-offs should all be documented.

Finally, when buying or selling a business, it is vital that you understand what is for sale, what is not for sale and what is included whether it is machinery or intangible assets such as intellectual property. Understanding the barriers to entry, the company's competitive advantage and what key agreements with employees and suppliers are already in place, will help ensure a smooth and stable transition. There are many important questions that must be answered during the due diligence process. Working closely with a business broker helps to ensure that none of these vital questions are overlooked.

Copyright: Business Brokerage Press, Inc.

When Selling Your Business, Play to Win

March 7, 2018

Kevin A. Nery, CBB, CBI, M&AMI


When Selling Your Business, Play to Win

If you are an independent business owner, you are most likely also an independent business seller-if not now, you will be somewhere down the road. The Small Business Administration reports that three to five years is a long enough stretch for many business owners and that one in every three plans to sell, many of them right from the outset. With fewer cases of a business being passed on to future generations, selling has become a fact of independent business life. No matter at what stage your own business life may be, prepare now to stay ahead in the selling game.

Perhaps one of the most important rules of the selling game is learning how not to "sell." An apt anecdote from Cary Reich's The Life of Nelson Rockefeller shows a pro at work doing (or not doing) just that:

When the indomitable J.P. Morgan was seeking the Rockefeller's Mesabi iron ore properties to complete his assemblage of what was to become U.S. Steel, it was Junior [John D. Rockefeller, Jr.] who went head-to-head with the financier. "Well, what's your price?" Morgan demanded, to which Junior coolly replied, "I think there must be some mistake. I did not come here to sell. I understand you wished to buy." Morgan ended up with the properties, but at a steep cost.

As this anecdote shows, the best approach to succeeding at the selling game is to be less of a "seller" and more of a "player." Take a look at these tips for keeping the score in your favor:

Let Others Do the Heavy Pitching

Selling a business is an intense emotional drain; at best, a distraction. Let professional advisors do the yeoman's duty when selling a business. A business intermediary represents the seller and is experienced in completing the transaction in a timely manner and at a price and terms acceptable to the seller. Your business broker will also present and assess offers, and help in structuring the transaction itself. If you plan to use an attorney, engage one who is seasoned in the business selling process. A former Harvard Business Review associate editor once said, "Inexperienced lawyers are often reluctant to advise their clients to take any risks, whereas lawyers who have been through such negotiations a few times know what's reasonable."

Stay in the Game

With the right advisors on your side, you can do the all-important work of tending to the daily life of the business. There is a tendency for sellers to let things slip once the business is officially for sale. Keeping normal operating hours, maintaining inventory at constant levels, and attention to the appearance and general good repair of the premises are ways to make the right impression on prospective buyers. Most important of all, tending to the daily running of the business will help ward off deterioration of sales and earnings.

Keep Pricing and Evaluation in the Ballpark

Like all sellers, you will want the best possible price for your business. You have probably spent years building it and have dreamed about its worth, based on your "sweat equity." You'll need to keep in mind that the marketplace will determine the value of the business. Ignoring that standard by asking too high a price will drive prospective buyers away, or will at the least slow the process, and perhaps to a standstill.

Play Fair with Confidentiality

Your business broker will constantly stress confidentiality to the prospects to whom he or she shows your business. They will use nonspecific descriptions of the business, require signatures on strict confidentiality agreements, screen all prospects, and sometimes phase the release of information to match the growing evidence of buyer sincerity. As the seller you must also maintain confidentiality in your day-to-day business activities, never forgetting that a breach of confidentiality can wreck the deal.

Sell Before Striking Out

Don't wait until you are forced to sell for any reason, whether financial or personal. Instead of selling impulsively, you should plan ahead carefully by cleaning up the balance sheet, settling any litigation, providing a list of loans against the business with amounts and payment schedule, tackling any environmental problems, and by gathering in one place all pertinent paperwork, such as franchise agreement (if applicable), the lease and any lease-related documents, and an approximation of inventory on-hand. In addition, you could increase the value of your business by up to 20 percent by providing audited financial statements for one or two years in advance of selling.

Think Twice Before Retiring Your "Number"

The trend is for sellers to assume they will retire after selling the business. But consider this: agreeing to stay on in some capacity can actually help you get a better price for your business. Many buyers will pay more to have the seller stay aboard, thus helping to reduce their risk.

Keep the Ball Rolling

You need to keep the negotiation ball rolling once an offer has been presented. Even if you don't get your asking price, the offer may have other points that will offset that disappointment, such as higher payments or interest, a consulting agreement, more cash than you anticipated, or a buyer who seems "just right." The right buyer may be better than a higher price, especially if there is seller financing involved, and there usually is. In many cases, the structure of the deal is more important than the price. And when the ball is rolling, allow it to pick up speed. Deals that drag are too often deals that fail to close.

By following these tips, and by working closely with your business broker, you can have confidence in being a seller who, like John D. Rockefeller, Jr., doesn't "come here to sell." You will play the selling game-and be a winner.

Copyright: Business Brokerage Press, Inc.

There's No Business Quite Like a Family Business

February 21, 2018

Kevin A. Nery, CBB, CBI, M&AMI


There's No Business Quite Like a Family Business

The simple fact is that family businesses are different. After all, a family business means working with family and all the good and bad that comes with it.

While an estimated 80% to 90% of all businesses are family owned, relatively few are properly planning for what happens when it comes time to sell. According to one study, a whopping 72% of family businesses lack a developed succession plan which is, of course, a recipe for confusion and potentially disaster. Additionally, there are many complicating factors, for example, studies indicate that 40% to 60% of owners of family businesses want the business to remain in the family, but only 40% of businesses are passed to a second generation and a mere 10% are passed down to a third generation.

Let's turn our attention to a few of the key points that family business owners should consider when selling a business.

  1. Confidentiality should be placed at the top of your "to do" list. When it comes to selling a family business, it is vital that confidential is strictly observed.
  2. Remember that it may be necessary to lower your asking price if maintaining the jobs of family members is a key concern for you.
  3. Family members who stay on after the sale of the business must realize that they will no longer be in charge. In other words, after the sale of the business the power dynamic will be radically different, meaning that family members will now have to answer to new management, outside investors and an outside board of directors.
  4. Family members will want to appoint a single family member to speak for them in the negotiation process. A failure to appoint a family member could lead to confusion, poor decision making and ultimately the destruction of deals.
  5. When hiring a team to help you with selling your business, it is critical that your lawyer, accountant and business broker are all experienced and proven.
  6. Don't hold meetings with potential buyers on-site.
  7. Every family member, regardless of whether they are an employee or an investor, must be in agreement regarding the sale of the company. Again, one of your primary goals is to avoid confusion.
  8. Family employees and family investors must be in agreement regarding the sale price or there could be problems.

Working with an experienced business broker is a savvy move, especially when it comes to selling a family business. Business brokers know what it takes to make deals happen. Being able to point to a business brokers' past success will help reduce family member resistance to adopting the strategies necessary to successfully sell a business.

Copyright: Business Brokerage Press, Inc.

It's Time To Embrace CSR (Corporate Social Responsibility)

November 8, 2017

Kevin A. Nery, CBB, CBI, M&AMI

It's Time To Embrace Corporate Social Responsibility

If you are unfamiliar with CSR or corporate social responsibility, you are certainly not alone. In the coming years, you'll be hearing a lot about CSR. In this article, we'll look at CSR and how, when implemented with sincerity, it can positively impact your company and its operation.

Building Your CSR Locally

One of the key ways that you can build your CSR is to think about ways to help your community. Contributing to local community programs, for example, is a great place to start. Everything from personal involvement to direct financial support can help build your company's reputation within your community.

Your Connection to the Environment

A second way to build your CSR is to show that your company is thinking about its impact on the environment. Recycling is important but so is using eco-friendly packaging and containers. Additionally, embracing low-emission and high mileage vehicles is another good step as this lowers your company's carbon footprint.

Advertising and Good PR

A third area to consider is how your company interacts with the marketplace. Using responsible advertising, business conduct and public relations is a savvy move. Likewise, providing fair treatment of your shareholders, suppliers and vendors and contractors will all help to improve your CSR.

Yet, one of the single most important areas of corporate social responsibility occurs in the workplace. The advent of social media has helped fuel the dispersal of information. If your business isn't treating its employees in a fair manner and/or has unsafe work conditions or unfair employment practices, the word will eventually get out. There has never been a more important time to treat your employees well.

Embracing CSR serves to increase shareholder and investor interest. In short, it is expected. Socially-conscious companies are considered smart and stable investments. A company that has fully embraced CSR will find greater buyer interest and even a higher selling price when the time comes to sell. Most buyers want excellent customer loyalty with no skeletons hiding in a company's closet. They also are seeking happy and loyal employees, low employee turnover and for a company to have a good reputation within a community. CSR helps achieve all of these goals and more.

Ultimately, corporate social responsibility works to create additional value. When you invest in CSR, you are investing in achieving a higher selling price and making your business more attractive to sellers. Summed up another way, you can't afford not to think about this topic.

Copyright: Business Brokerage Press, Inc.

You Know the Old Saying About Loose Lips? How Does It Impact You?

November 2, 2017

Kevin A. Nery, CBB, CBI, M&AMI

Safeguard your business from leaks

The saying "loose lips sink ships," doesn't have ancient origins. While it sounds like one of those sayings that has been around forever, the saying was actually invented during World War II. It was taken quite literally. The idea was that a lack of secrecy could lead to the loses of actual ships or other wartime deaths. So in other words, this saying was serious business. It should come as no surprise that this saying is alive and well in the business world.

Few things are more important than safeguarding your business from leaks. Leaks can, simply stated, spell disaster for your business. Leaks can be particularly damaging if you are looking to or are in the process of selling business. A leak that you are planning on selling your business can have a range of consequences. Everyone from employees to customers, suppliers and, of course, prospective buyers and competitors could all take notice and this could have ramifications.

Yet, confidentiality stands as a bit of a Catch-22 situation. Sellers want to get to the best price possible for their business and that means letting prospective buyers know that the business is for sale. The greater the number of potential buyers contacted, the greater the chances of receiving top dollar. However, the more potential buyers that know you are interested in selling, the greater the risk of a leak. Clearly, this situation represents a considerable dilemma.

As a buyer, you may discover that owners can be overly, perhaps even irrationally concerned, about leaks. It is important to remember that for most owners, the business represents their largest asset and often their greatest professional accomplishment in life. In other words, they have a lot riding on their business. It is important to remind sellers that the less time a business is on the market the lower the risk of a leak. Also, the longer the negotiations go on, the greater the risk of a leak.

Sellers should always remember to keep all important documents related to the potential sale or sale literally under lock and key. Everything should be considered confidential and only transferred to buyers in a highly secure fashion. Confidential information shouldn't be emailed or faxed, as this makes a leak much easier. Sellers and buyers alike should remember that they shouldn't discuss the sale or potential sale with anyone. Confidentiality should be stressed at all times.

Working with a business broker is one way to dramatically reduce the risk of a leak occurring. For business brokers, confidentiality is a cornerstone of their operations. Business intermediaries require buyers to sign very strict non-disclosure agreements. While loose lips may sink "ships," there is no reason that your business, or the one you are interested in buying, has to be one of those ships.

Copyright: Business Brokerage Press, Inc.

Top Four Statistics You Need to Know About Ownership Transition

November 1, 2017

Kevin A. Nery, CBB, CBI, M&AMI

Top Four Statistics You Need to Know About Ownership Transition

If you own a business, then ownership transition should definitely be a central topic in your planning. A few years ago, MassMutual Life Insurance Company conducted a very interesting and thought-provoking survey of family-owned businesses. Obviously, family-owned businesses have their own unique needs and challenges. The MassMutual Life Insurance Company survey certainly underscored this fact. While the survey was conducted a few years ago, the information it contained is more relevant and actionable than ever. Let's take a closer look at some of the key conclusions and discoveries.

Founder Control

One of the most important findings of the survey was that a full 80% of family-owned businesses are still controlled by the founders. The survey also discovered that 90% of family-run businesses intend to stay family-owned in the future.

Lack of Leadership Plans

Leadership is another area of great interest. Strikingly, approximately 30% of family-owned businesses will in fact change leadership within just the next five years. Moreover, 55% of CEOs are 61 or older and have not chosen a successor. When a successor has been chosen that successor is a family member 85% of the time. Succession is often a murky area for family-owned businesses. A whopping 13% of CEOs stated that they will never retire.

Failure of Proper Valuations

According to the survey, valuation is another surprise area. 55% of companies fail to conduct regular evaluations, meaning that they are essentially flying blind in regards to the true value of their company. Adding to the potential confusion is the fact that 20% of family owned businesses have not completed any estate planning and 55% of family-owned businesses currently have no formal company valuation for estate tax estimates.

Lack of Proper Strategic Plans

The financials for family-owned businesses are often just murky as their succession issues. The MassMutual Life Insurance Company survey also discovered that 60% of family-owned businesses failed to have a written strategic plan and a whopping 48% of family-owned businesses were planning on using life insurance to cover estate taxes.

Simply stated, many family-owned businesses are not organized properly and are, in the process, not fully taking advantage of their opportunities. In short, family-owned businesses are frequently insular in their approach to a wide range of vital topics ranging from succession and leadership to valuation, planning and more. In the long term, these vulnerabilities may serve to undermine the business making it harder to sell when the time comes or opening it up to other problems and issues. Family-owned businesses are strongly advised to work with professionals, such as experienced accountants and business brokers, to ensure the long term profitability and continuity of their businesses.

Copyright: Business Brokerage Press, Inc.

Reasons for Sale

October 11, 2017

Kevin A. Nery, CBB, CBI, M&AMI

Reasons for Sale

The reasons for selling a business can be divided into two main categories. The first is a sale that is planned almost from the beginning or by an owner who knows that selling is or should be a planned event. The second is exactly the opposite - unplanned; the sale is motivated by a specific event such as health, divorce, business crises, etc. However, in between the two major reasons, are a host of unpredictable ones.

A seller may not even be thinking of selling when he or she is approached by an individual, group or another company, and an attractive offer is made. The owner of a business may die, and the heirs have no interest in operating it. A company may bring in new management who decides to sell off a division or two; or maybe even decides that selling the entire business is in the best interests of everyone.

A major competitor may enter the market, forcing an owner to elect to sell. And the competition may not just be another company. The owner of a business may realize that an external threat is such that the company will lose a competitive advantage. New technology by a competitor may outdate the way a company produces its products. Two competitors may merge, placing new pressures on a company. The growth of franchising and big box stores can promote themselves on a much larger scale than a single business, no matter how good it is. National advertising can create the perception that a large business's pricing, inventory or service is better than the smaller competitor, even if it isn't.

Although these issues may not push a business owner or company management to consider selling, they are certainly causes for consideration. Unfortunately, most sellers fail to create an exit strategy until they are forced to. Professional athletes want to go out on top of their game, and business owners should do the same.

Copyright: Business Brokerage Press, Inc.

Benefits of Working with a Business Broker

May 3, 2017

No matter what type of business you're selling, you want to do it right. Working with a business broker ensures you receive top-dollar for your business, as well as close the sale more quickly and with less stress.

Learn more about the benefits of working with a business broker!

5 Simple Strategies for Lowering Risk Before Technical Due Diligence

May 1, 2017

Preparation for a business sale demands many considerations. In addition to cleaning up the books, managing expenses, and getting operations under control, contemporary owners must also consider the role of technology in the business. Technology plays an increasingly prevalent role in virtually all businesses, so technical due diligence is a key part of a business sale. A few simple risk reduction strategies can reduce the risk that technological due diligence will negatively impact the sale.

 

Take an Inventory of Hardware and Software

Buyers want to know what they’re getting when they acquire a business. Technological acquisitions are not exceptions. Owners should create detailed inventories of hardware and software, including networks, software packages, servers, third-party software, hardware such as computers, and cloud vendors currently in use by the business. Note whether any hardware on the list is leased or owned, the costs of ownership or the lease, and whether there is a warranty or on-site service agreement.

A comprehensive IT system inventory prepared for due diligence expedites the process. It can also make a favorable impression on the acquirer, since businesses with organized inventories look more impressive on paper.

 

Audit Software Licenses

List licenses alongside the relevant software for each software item listed in your inventory. Software that has been purchased outright usually comes with a licensed key. Leased software from another vendor may have an access key. ERP software is frequently sold this way. Software as a service (SaaS), as well as some other software, may be charged on a monthly user agreement fee.

Some vendors, such as Microsoft, offer online portals that list software you have purchased. Your tech team should be able to create this list of software and licenses. This license audit can save time, as well as embarrassment. If you have pirated software, this looks bad to the acquirer, and can even land you in legal trouble.

 

Verify the Rights to Custom Code

Business often purchase customized software for internal management, services, or products. When you’re ready to sell, you must prove that you legally own these custom software products.

When the software is created by a contractor, verifying that you own the product may not be simple. You’ll need the work-for-hire or licensing agreement to prove your ownership, and this agreement should clearly state that you own the work product. You may also need to demonstrate that you paid the final amount owed.

With custom code, it can also be helpful to format source code files with a standard header that clearly shows ownership, copyright, and other purchasing details. Explicit proof that you own your custom software expedites the process of due diligence and bolsters the confidence of the purchaser.

Gather this documentation in anticipation of the sale.

 

Document Data Flow and Storage

Internal, consumer, and product data play key roles in due diligence for a sale. You must know which technologies your company uses, and where its most important data is housed. Make a list of any and all relevant data flows and stores, since this information can affect integration after the merger. Remember to list customer databases, finished good databases, accounting systems, manufacturing systems, and other relevant data.

Systems that integrate by conveying key data back and forth are useless without the flow diagram. Prepare this information in anticipation of due diligence.

Providing the acquirer with a complete and accurate list of vital data flows and stores the first time, without being nagged to do it, establishes trust. It also shows an attention to detail.

 

Review and Strengthen Security Practices and Policies

With millions of hack attempts each year, network and data security should be key considerations for all businesses. Hacking incidents can cost businesses millions, destroy reputations, and trigger legal difficulties. According to the National Cyber Security alliance, data breaches are so costly that 60% of small businesses are unable to remain afloat in the six months following a cybercrime attack. Buyers know this.

Your security policies and procedures directly impact the value of your business and the outcome of the sale. Verizon recently revised a purchase offer from $4.83 billion to $4.48 billion due to large data breaches at Yahoo.

Security training that is a regular part of corporate discussions can demonstrate your commitment to security. Make sure clear protocols are in place, and that your staff actually follows these protocols to protect your intellectual property and information technology assets.

Owners weighing a possible sale should perform a comprehensive information security audit. Use a reputable third-party firm who will offer unbiased information and provide the owner with a clear, detailed report. This allows management to take proactive steps that address any concerns in the report, potentially raising the value of the business to a would-be acquirer, and preparing for the process of technological due diligence.

Prepare Early for Due Diligence

November 26, 2016

Once you’ve agreed to the price and terms of a transaction with a potential acquirer or investor, the next step is typically the arduous process known as due diligence.

Due diligence is the confirmatory period where the party investing or acquiring your business seeks to understand every nook and cranny of the company. This entails pouring over financial statements to understand revenue and profitability trends as well as deeper details like cash flow, inventory turn and normalized working capital requirements. Due diligence also happens to be where most transactions fall apart. Buyers will also want copies of all contracts relating to the business including leases, employee agreements, software licenses, bonus plans, health coverage, royalty agreements, distribution agreements, supplier agreements and more.

If your head is not spinning yet, on top of that they will often want to see financial projections, defined growth opportunities and may even want to visit with members of the senior management team, major suppliers and key customers. While business owners in smaller, niche or local markets like Massachusetts, Rhode Island and Connecticut are often very protective of critical business information, once diligence starts, the business owner will need to comply in order to secure or defend the agreed upon value of the business.

This may seem like like a lot, but put yourself in the buyer’s shoes.

M&A is not like the stock market. What buyers are purchasing is non-liquid and they need to understand the business as clearly as possible so that they can mitigate risk and hopefully ensure their return is up to their standards or the standards of their investors. The result of this intense period of business scrutiny is that issues are often discovered that can limit value or, worse, derail the entire transaction.

The benefit of hiring a business intermediary to help you through the sale is that you can discover these issues early on by doing an extensive amount of pre-diligence. Properly executed pre-diligence can lead to fast close times and reduced cost of post LOI due diligence.

Prior to marketing your business to potential investors or acquirers, your business intermediary will essentially take you through the complete due diligence process as they learn about all aspects of your company through developing the Confidential Information Memorandum (CIM). This may seem tedious and gathering all of the data will take time, but catching any potential issues early on and strategizing with your investment banker or business intermediary on the best way to diffuse them will be invaluable later on.

Disclosing any issues and avoiding value-lessening surprises is a huge credibility booster in the eyes of buyer and investors, which is paramount to maximizing value.

Legal diligence is also something that handled on the front end of the transactions process. Ensuring that all contracts that need to be transferable or assignable are indeed transferable or assignable and that any litigation clouding the company is resolved can save a deal.

Environmental diligence can also be important, especially for businesses that involve chemicals, speciality materials or fossil fuels. Making sure the facility and process are all up to regulation is important. A major environmental issue that shuts down one or more facilities can certainly be a deal killer.

Employment issues can be tricky to head off early on, because in most cases you do not want your employees to know the company will possibly be sold. However, making sure all employee agreements are solid and ensuring there are no potential grievances will only make your transaction all the more smooth.

Pre-diligence, the process of preparing yourself for due diligence, will help mitigate the risk of deal failure and will better prepare you and your company for the involved process that closely follows accepting an offer.

What Makes Your Company Unique?

October 20, 2016

When it comes to selling your New England based business, one of the most important aspects to convey to any buyer is what separates your company from all the others in the same sector – the “magic,” of your particular company, if you will.

Sure your products or services may be similar to that of your competitors, but what specifically differentiates your company? Do you have proprietary processes, is your customer service far superior to anyone in the space, are your internal systems so finely honed that your business is virtually automated?

Of course, revenue, profitability, customer concentration, etc., are important to potential buyers, but intangibles can make your company highly valuable. Below are some important intangible aspects that can significantly add to the perceived value of your business:

  1. Uniqueness – Almost all businesses in Rhode Island, Massachusetts and the greater New England area have competitors, whether they are completely similar or just mildly tangential. However, even if you are selling or distributing the same product there is something that sets your company apart from the pack. This could be anything from a long-term well negotiated and easily transferrable lease, to a broad well-researched customer list that would be virtually impossible to duplicate.
  2. Identity – Your brand name may be worth far more than you actually believe it is. This is especially the case if you are in a niche segment of the market with relatively few competitors. Your brand may actually be worth more in the hands of a potential buyer than it is in yours. In smaller or localized markets like many in New England, buyers with the resources to fully exploit your brand will pay for the rights to own it.
  3. Positioning – Whether or not you are the dominant entity in your space or region there is most certainly another company, or group of companies, that would like to have access to your customer base. If you are the market leader, this makes you all the more valuable as buyers look for assets that have a large, diversified and loyal customer base. This holds true particularly for buyers looking to enter our local markets in Rhode Island, Massachusetts and the greater New England area.
  4. Buying/Pricing Power – If your business has been established for a long period of time and you have strong long-term relationships with your suppliers that enable to buy cheaply, sell your product at value prices, and still make a healthy margin you are all the more attractive to buyers. These types of relationships are very difficult to establish and cannot be duplicated easily. If you can charge less than your competitors, you already have a pretty significant advantage.
  5. Tax Advantages – Maybe you had a couple years in the past that were not particularly fruitful enabling you to mitigate taxes by carrying over net operating losses for a number of years down the road. These types of assets can be highly valuable, especially for buyers seeking ways to limit their tax burdens.
  6. Tribal Knowledge – If your staff and management team has deep industry knowledge and relationships that are key to revenue and profitability, a buyer will certain have to pay for that. Knowledge that cannot be easily transferred is a key competitive differentiator.
  7. Proprietary Systems – If your business has developed proprietary technology to make the business more efficient and streamlined this can positively affect sales and profit margins. A buyer will usually pay more for companies that have invested significant dollars to make their company run smoothly while lowering costs.

While buyers certainly look at historical financials as the primary indicator to determine value, the intangibles can be almost as important to achieving the true value that your company deserves. If you are considering selling your business in the in Rhode Island, Massachusetts and greater New England area you can maximize value by working with a business broker/intermediary that can maximize your intangible value by distilling ‘your magic’ into something saleable.

What Does Your M&A Advisor Expect From You

September 19, 2016

Starting the business sale process can be daunting. With new advisors, expectations and the hope of a fruitful exit, the process can start to get complex quickly. To this point, you’ve done everything correctly in preparing to sell your business:

  • Consulted your advisor network (Accountants, Lawyers etc.)
  • Interviewed multiple business sale intermediaries to facilitate the process
  • Selected the right firm to represent you based on track record, sector expertise, and geography served
  • Insured you have transferable management in place capable of running the business after you exit your business

Once your business broker/intermediary has actively prepared to confidentially market the sale of your business what are you supposed to? What is your role in the business sale process?

The answer is a lot simpler than you might imagine – do you job, like nothing has or will change.

That’s right, you may be mentally preparing for a significant change in your personal and professional life, but the best thing to do is to keep running your business. The business sale process may take longer than expected and buyers can be influenced by the current performance of the business, rather than exclusively focusing on historical performance. A potential buyer will want to see the business continuing to perform optimally throughout the entire process.

As your business broker/intermediary gets further along in the process of marketing the sale of your business, your responsibilities in the process will change as you participate in vetting potential buyers.

A few components of the business sale process may take you away from the day to day periodically as follows:

  • Introductory management calls – After your broker/intermediary has executed a nondisclosure agreement with a potential buyer, qualified them financially, and provided the needed marketing materials and documentation, parties interested in learning more will want to set up an introductory management call with the current owner(s). During these calls the potential buyers will want to confirm much of the information in the marketing materials and learn a bit more about your company, operations, financials and future business prospects. Do not expect to discuss transaction value on these calls. Additionally these calls are a good opportunity for sellers to learn about the potential buyer, their culture, industry experience etc.

  • Face time – After initial vetting on management calls, expect a long round of phone calls to narrow the pool of interested parties down to a group of serious potential buyers. At this time, these parties want to meet in person. To maintain confidentially, you may want to schedule these meetings off-site or after normal business hours.

  • After all the meetings are complete and you’ve signed an exclusive Letter of Intent with a well fitting buyer, the best thing you can is to continue running your business as efficiently and productively as possible. This stage of the process will involve generating documentation for due diligence and insuring the attorneys are preparing the documents correctly. During this time you can lean heavily on your business broker/intermediary to insulate you from the often overwhelming data requests which are common.

  • Post-closing – After the transaction closes most buyers will want previous ownership to stay on for a pre-determined period of time that can range anywhere from three months to years. This integration period will be very important for the new owner as they transition the business under their ownership. This period will entail introducing the new owners to current customers, suppliers and ingratiating them with the workforce.

A qualified business broker/intermediary like Nery Corporation can mitigate much of the demand put on a business owner during the sale process, you should enter the transaction with a goal above all others - continue running your business as if you were to continue to own the business indefinitely.

Do you really need a business broker or M&A advisor to sell your Rhode Island Or Massachusetts based business?

August 24, 2016

Middle market business owners in the competitive Rhode Island and Massachusetts markets who are looking to sell their businesses will likely find plenty of suitors from both the strategic and private equity sectors. After all, Rhode Island and Massachusetts are hubs for innovation, technology and healthcare industries making the area's businesses ripe targets for acquirers looking to deploy capital in good, profitable companies.

So what happens if you, a Rhode Island or Massachusetts business owner, get approached directly by a potential buyer with what seems to be a compelling offer to buy your business? You need to start by securing proper representation. Without a right team advocating on your behalf you invite a number of risks, including:

  1. Under valuation of your business.
  2. Sharing confidential information with competitors and tire kickers.
  3. Increased legal and financial exposure

1. Positioning – An M&A advisor or business broker will develop a Confidential Information Memorandum (CIM), which is a detailed technical document explaining the ins and outs of your business from operations to growth opportunities to financial performance. The key here is financial performance. An M&A advisor or business broker can help significantly improve the valuation of your business by recasting your financials (adding back one-time expenses and other anomalies to your EBITDA) to drive substantially higher multiples and values as well as packaging your business offering in a way that professional buyers are used. Without the positioning support of your advisor you may not truly understand your businesses value or how to market it to other potential buyers.

2. Process – That original buyer that approached you may still be the best buyer, but the only way to know for sure is to shop your business to multiple buyers, both strategic and financial. An M&A advisor or business broker will create a competitive environment with multiple buyers, which will, in turn, drive higher valuations as the interested present their best offers. The advisor manages the process including information controls, offers and communication. Until you have an in depth view of what the market thinks your business is worth you may not have the needed information to make the best decision.

3. Structure – Even if the overall value of your business sale is satisfactory, the structure of the deal may not be. The bulk of the payouts may be contingent, you may be asked to carry a percentage of the purchase price, there could be numerous parts of the deal structure that benefit the buyer more than you. An M&A advisor or business broker is there to advocate for you to ensure you get the highest value and the best structure possible.

Clearly, we encourage every business owner considering the sale of his or her business to work with a deal professional. With many firms working largely on fees generated by the successful sale of your business, the advisor wins when they have produced a quality final result. In short, the benefits far outweigh the costs.

If you have questions on how to sell your business and are located in the greater Rhode Island or Massachusetts area please contact us. We pride ourselves in our ability to help you navigate the complex transactional process and focus primarily on serving small and mid sized business owners in our hometown markets.

Please contact us for a confidential, complimentary consultation to further explore how The Nery Corporation will work together with you to successfully achieve your goals.

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