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What You Must Know About Selling a Business in a Depressed Economy.

January 5, 2010 By Leave a Comment

There are certain things we always warn our clients about when they are selling a business. One of the issues we regularly address is making sure that the seller and their unrelated personal and business assets are adequately protected from any potential future litigation, including that often created by the buyer if he or she can’t make the business work like you did and existing employees that may not be happy about the change or losing their jobs. 

Our advice; plan for the worst (implement legal, proactive asset protection strategies) hope for the best, and have professional counsel in the sale and valuation of the business. For help in the valuation area I turned to our friend Sean Sheppard with Valcor, a professional business valuation company that works with clients nationwide. – Ike Devji

Preparing a Business for Sale in a Depressed Economy

By Sean Shepherd

Economic tidal waves have crashed against the shores, affecting every business sector. Enterprises that have been in operation for 20, 30 and more years are now hanging on by a thread. In every sector you will find a business that faces an uncertain future, finding someone to buy the business and prepping the company for sale could be their best remaining option.

Like most economic crunches, cash is king. However, many business leaders do not have experience managing a business around cash flow. They have spent their entire careers focused on earnings and growth, and now find it hard to change their tact in such stormy seas. Assess your financial condition. Is the company financially under performing or distressed? This assessment should show how much cash you need to generate and how quickly you need it.

Short-term cash requirements will trump a long-term strategy. In a less severe marketplace, it is smart to develop a sound long-term strategy and stay on course. If a short-term cash crisis drives a company out of business, your long-term strategy becomes irrelevant.

Cash flow wins vs. earnings per share. The key to survival is cash flow. That becomes an epic shift in mind-thought for most CFOs and managers. Since companies don’t normally focus on cash, that have troubles determining what their cash position is – or how long their cash will last. Distressed companies should track and forecast cash flow weekly, or even daily.

Attack from all angles. To build a war chest of cash, the company requires all of the leadership to be on the same page in making cash the top priority. All potential cash sources must be thoroughly examined over and over again. These sources include everything from uncovering price leakage to reducing cost and working capital to selling underutilized assets.

Build a portfolio. Develop a portfolio to generate cash. Focus on cost and working capital to generate an immediate liquidity cushion and to fund longer-term structural programs such as selling off business units or closing stores. A tactical combination of activities will strengthen the balance sheet and help to capitalize on the rebound.

Action speaks louder than analysis.. Companies do not have time for detailed analysis or extended period of times pondering and thinking. The longer the company waits to choose a path, fewer options become viable.

Fire drill. Develop multiple downside financial scenarios for the business to learn what the key trigger points are, and more importantly, what specific actions you will immediately take to save cash.

Dig in and get back to growth a later date. Businesses focus on growth, except in the current economy. That usually means closing plants, laying off staff, liquidating underused assets, spinning off non-core businesses, and terminating unprofitable customer relationships. After digging in, there will be a reduction in cash erosion and new cash generated through asset sales.

Play for time, without stalling. Distressed sellers have only so much time available to arrange a sale. It depends upon liquidity: it’s a straight forward concept, the less capital you have, the less time you have to sell, and the lower the purchase price you’ll likely receive. The cost of accepting a new co-owner, or even taking on additional debt, may be worth it for the extra weeks or months to find the right buyer. Short-term cash infusions at this juncture also may provide you with an alternative to unappealing offers from opportunistic buyers. In this environment that sort of buyer will be the norm, and will seek out companies in desperate straits. The company will be so anxious to sell that it will accept a low price and unfavorable terms.

Court your buyer(s) and be flexible. The liquidity situation also will determine how to market a company to prospective buyers. From a tactical point of view, they may want to confine your efforts to a short list of prospective buyers that are willing to conduct abbreviated due diligence in exchange for pricing concessions or strong material adverse clause provisions that enable the buyer to pull out without repercussions. Which type of acquisition makes the most sense for the company? If they have two or three distinct operations, it may be easier and more lucrative to sell each division to separate buyers. A buyer may anticipate synergies with one a certain product lines, but have no use for another part of your business. For example one of your divisions is in better financial condition than the others, meaning they may get a higher amount for that piece than if it were bundled with the-troubled segments.

Recognize the buyer’s needs in advance. Although due diligence often is considered the buyer’s responsibility, distressed sellers must perform their own due diligence. Buyers considering your company will expect to unearth some problems, but reduce the chance of future surprises. For example, that you should tell the buyer if you expect a further deterioration of your customer base or a lower growth rate going forward.

Also, a seller’s representative will have compiled the following request for information from prospective buyers:

• Buyers historical and current financial performance numbers • An accurate tally of assets • Conservative future growth and performance forecasts • Detailed analyses of all regulatory issues or outstanding litigation claims • Provide up-to-date and detailed records of suppliers and customers • If applicable, which third-party agreements would most benefit from such an alliance

In short, different companies have different needs and there is no one solution to address how to prepare an enterprise for sale. Now batten down the hatches, possible tidal waves ahead. For help or more info, please contact: Sean Shepherd sshepherd@valcoronline.com or 602.954.0010

Filed Under: 2010 Economic Outlook, Asset Protection, business legal planning, business valuation, buy sell agreement, economy, Ike Devji, Sean Shepherd Tagged With: , , , , , , , ,

Do You Really Need A Buy/Sell Agreement?

December 8, 2009 By Leave a Comment

The post below is excerpted from the news letter of a colleague, financial advisor Steve Beatty who works with successful business owners all over the U.S. from his offices in the Las Vegas area. This edition of Steve’s newsletter really deserved to be shared because it efficiently summarizes we exposures of not having a buy sell in place that can easily wipe out a business or family.

Yours, Ike

Part I

In our last issue of this Newsletter, we discussed the problems that can arise if a business continuity (buy/sell) agreement designed for one event (usually the death of a shareholder) is called upon to manage the more likely event of a shareholder’s departure during his or her lifetime. Lifetime departures may occur due to the retirement, termination, divorce or bankruptcy of an owner.

While it is true that poor design or failure to update the agreement—especially in tough economic times—can create significant problems, does that mean you and your co-owners shouldn’t have one in place? In a word, NO! The business continuity agreement may be one of the most important documents that you, as a co-owner of a closely held business, will ever sign.

For an idea of why, consider the case of Acme, a fictional company.
George Acme’s son-in-law, Tom Gardner, had worked for George for over 20 years. Tom had gradually assumed operational management and was the acting CEO. In recognition of Tom’s contribution, George had sold Tom—mostly at a low value—25 percent of the company.

Everyone expected that Tom would one day own Acme, Inc. But before that day arrived, George died and Tom’s sister-in-law became the executor of George’s estate. She decided to sell George’s share of the company—at its full fair market value and for cash—either to Tom or to the highest bidder. At the time, she did not understand that no third party would acquire a majority position in a company co-owned and run by a disgruntled CEO.

Had Tom and George created a business continuity agreement that reflected their wishes about value, control and successor ownership, the business would have transferred at a fair price to the benefit of all concerned. Because they had not done so, Acme was unlikely to continue at all.

As mentioned earlier, a business continuity agreement can control the transfer of ownership in a business when a variety of events occur including: an owner’s death, permanent and total disability, termination of employment, retirement, bankruptcy, divorce, and a business dispute among the owners.

The buy/sell agreement can further require that the business or the remaining owners to purchase the departing owner’s stock; or it may give an option to the business or the remaining owners to buy that ownership interest.

Lastly, it may give the departing owner the option to require the company to buy his or her ownership interest.

The agreement should establish the value of the stock, set the terms and conditions of the buyout, and give additional protection to all owners. In short, the business continuity agreement tells owners to whom they can sell, at what price and terms, and under what restrictions they can sell stock.

Advantages of a Buy/Sell Agreement.

The disadvantages of a buy/sell agreement are few if the document is well drafted and is kept updated for changes in ownership, value and other circumstances. (See Issue175.) With that in mind, the major advantages of a buy/sell agreement are:

1. Ownership in the business can be transferred only in accordance with the agreement. This benefits both the owner wishing to transfer stock and the other owner(s) wanting to acquire stock. In the first instance, the buy/sell agreement can provide a selling shareholder, or his/her estate, with a purchaser for fair value and upon terms and conditions that are mutually acceptable. For remaining owners (such as Tom), the agreement provides that any transfers of ownership must be made, or at least offered, to them. This eliminates the threat that an outside party or a co-owner’s spouse or children will become owners of the business, thereby diminishing management, control and value.

2. Valuation is set not only for purposes of a sale, but also for estate tax valuation purposes. Privately owned businesses are notoriously difficult to value. Your idea of your business’s value at your death may be much lower than the IRS’s. If you haven’t created a binding process for valuing the business, the IRS is free to impose its own determination of value. Take the initiative by designing a valuation appraisal process in your buy/sell agreement.

3. The terms and conditions of any transfer of stock, including interest rate, length of buyout period, and security can be fixed. In addition, where possible, the transfer can be funded. The agreement provides a clear estimate to a departing shareholder of how much money he or she will receive and how often. Likewise, the remaining shareholders know in advance the extent and duration of their buyout obligations. This allows both parties to plan their respective futures.

Had Tom and George created a buy/sell agreement with terms like these, a valuable business could have been transferred successfully. That transaction would have benefited Tom, George’s estate (family), Acme’s employees, customers, vendors and community.

Subsequent issues of The Exit Planning Review™ discuss all aspects of Exit Planning. The provider of this Newsletter (Steven Beatty) offers you unbiased information about what you may need to know — How To Run Your Business So You Can Leave It In Style™.

To get more info on these topics and Steve’s great newsletters please contact him directly 702.804-6474 sbeatty@invest4business.com

Filed Under: Asset Protection, business legal planning, buy sell agreement, Ike Devji, Steve Beatty