Morgan & Westfield Deal Talk
Jeff: Welcome to Deal Talk brought to you by Morgan & Westfield, I'm Jeff Allen. If you're a business owner, entrepreneur, or investor this is the place to be. It's our mission to educate and inform you with the help of some of the most credible, highly-regarded experts in the industry of transacting businesses so that you'll be equipped with the knowledge to help you make important decisions when the time comes to sell your business or to buy one for that matter. Being the owner, or one of the owners of your business you have a lot to be mindful of in the day-to-day operations of your company. For most business owners, selling your company or even thinking about it may not be the first thing that you consider when you arrive at the office every day. But the time may come sooner than you think when you need to start preparing for the sale of your business, whether it's your share to a partner or the entire business outright.
Today we're going to talk about the necessary steps you need to take when preparing to sell your company, or the things that you need to think about and start putting plans in motion. To do that I'm joined by Mike Bankus, the principal at Goriano Experts and Advisors, a business valuation consulting firm serving businesses, attorneys, and CPA's, and he's also a business broker partner with Stony Hill Business Brokers. Michael Bankus, welcome to Deal Talk, nice to have you on.
Mike: Thank you Jeff, great to be here.
Jeff: You know Mike I have a lot going on. I'm a business owner, my business is thriving, I'm busy, and yet you're telling me that I should be giving a little thought to preparing for the eventual sale of my business. Why should I start to do that now?
Mike: The reason is that day's going to come someday, and the other reason is there could be things out of your control where maybe you're thinking, "Hey, I want to sell on 10 years, 15 years, or 5." And there could be life events, just a change in plans personally, or someone in your family might be ill and you might have to sell sooner. I've noticed from the last recession, the great recession that a lot of business owners decided to sell after that recession because they realized they really wanted to recoup some of the value of their business. And they decided to do that sooner rather than later.
The great recession that a lot of business owners decided to sell after that recession because they realized they really wanted to recoup some of the value of their business. And they decided to do that sooner rather than later.
Jeff: Mike is someone who has been in the business and kind of working various ends of it as you have. And being a business broker yourself I know that you have probably seen or heard of stories where the time came way too abruptly for some companies or some business owners to make a decision. And they weren't even prepared. Do you have stories or anything that you can relay, whether it be from something that you witnessed personally or something that you heard about? Perhaps from one of your business partners about a business owner who was just caught up in things, whether it be personal or economic and all of a sudden they have to ditch it. They need to get out and then they're stuck in a situation that seems just a desperate and just catches the best of them when they're not looking.
Mike: Yes. Actually I received a call yesterday from a business owner. He's only had the business for a year and he just really wants to change direction. The business is making money but he's there six days a week. He's a slave to the business. He's really desperate, motivated to selling to it. I said, "Mr. Seller, even if I said right now somebody is on the wing to buy this. It could take 60 to 90 days to close. There's a legal process, there's a due diligence process. It's not like find something off the shelf. It is a multi-month or it can be a multi-year process. Sometimes business owners get into a business, they just realize it's not for them. It happens a lot with franchises. The franchise concept is great. Say we can take some of the pain away through marketing and the program. But at the end of the day everybody's trying to support a certain lifestyle and gain a certain amount of income. Sometimes they just decide they need to sell and make a change.
Jeff: What happens is the business basically owns the business owner, and they're looking for a way to escape while the business is really successful. But there just seems to be a change of heart, or maybe all of a sudden something else comes up that they don't want to have to do anything with the business anymore. You talk about the business maybe 60 to 90 days to close but I think it was important that you pointed out. It could take much longer than that in fact, and sometimes years in many cases. What are the options that are out there? If I'm thinking about exiting my business, or Mr. and Mrs. Business owner, they're thinking about walking away from their manufacturing company or from their multi-location auto supply, auto service business, whatever it is that they have. What are the options that business owners have today Mike? When should they start planning for this?
Mike: To transition a business, there's really a couple of different paths. You can transfer to the next generation. You could sell it to an insider, a key employee, or you can put it in the market. A lot of companies do have succession plans where there's a certain depth of management. They're able to identify some key insiders and offer them stock or the ability to buy stock, give them some kind of vested interest. That's a good plan. I recently sold a business where the owner had four children and none of them wanted to be involved so we had to go the outside path, and find an outside buyer.
With the business sale and succession process, it's something where you should have your attorney involved and CPA involved. And a lot of times the plan is really, ok let's keep this business value updated so that we know what the value of the company is worth. Also, there's something that I call positioning the business for sale just like in the real estate business, houses are staged. To maximize value you really want to have your business be sold when it's all in upswing or when expenses are at their lowest and revenue's highest. There is what we call position of the company for sale. But again, that doesn't happen overnight because you can't pull the switch and you can't change things overnight with the business to have dramatic changes. It is something that is a challenge to business owners because, like you said, they're just busy keeping the machine going. And at some point they just need to dedicate a certain amount of hours per month or a quarter to transition or exit plan.
To maximize value you really want to have your business be sold when it's all in upswing or when expenses are at their lowest and revenue's highest.
Jeff: I think the key point that you made Mike is to make sure to have your business appraised sooner rather than later. And then stay on top of that would you say annually, to do a sanity check every year? How frequently in order to make sure that the valuation of the business is up to date Mike, what would you suggest?
Mike: I would suggest annually. The business cycle is annual. We're probably not going to see value change much from year to year, but every 2 to 3 years it could change. But one of the benefits of having it done annually is if there is a death or disability to one of the owners, that burden is taken away from the surviving family’s spouse. They don't have to worry about what his business is valued at. There's already a plan in place. The ties back into my last comment. There's all kinds of legal and tax ramifications that are outside my expertise and it really needs to be a joint effort between the CPA, tax attorney and financial planner when you're planning for the succession or potential sale.
Jeff: So you need to realize that a team needs to be involved, and that's really for your benefit. I'm talking with Mike Bankus. He's the principal at Goriano Experts and Advisors of business valuation consulting firm. He's also a business broker, a partner with Stony Hill Business Brokers. You touched on real estate just a moment ago Mike in your comments, kind of in the context of something larger there. But if I own the real estate, the commercial property where my business is located, is it necessary to have my business and real estate appraised separately? Should I do it together? Is there an advantage to doing it either way? What do you think about that?
Mike: I recommend doing it separately, and the reason for that is a lot of business evaluators aren't really qualified to appraise real estate.
One of the benefits of having it done annually is if there is a death or disability to one of the owners, that burden is taken away from the surviving family’s spouse.
Jeff: Some of them aren't qualified to do businesses either, I guess you can probably argue too.
Mike: Yeah, you need to have certain credentials in this industry. Real estate's a different process. There's regulations…FHA, government regulations and their specialists that value real estate. So you really want to un-bundle those two numbers. You want to know what’s the business worth, what’s the real estate is worth. The real estate is more like a commodity. Those values are certain. There's a lot of buyers and sellers for those properties. We're able to go on the internet and just the general line and like moments ago in that's fine what its worth. But the business is different. It's a little more difficult to arrive at value. You definitely need a separate valuation for the real estate.
Jeff: We're discussing the necessary steps when selling your business, and you're listening to Deal Talk. I'm Jeff Allen with Mike Bankus, principal at Goriano Experts and Advisors, and we'll be back after this.
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Jeff: Welcome back to Deal Talk. You're with Jeff Allen and my guest Mike Bankus, principal at Goriano Experts and Advisors, which provides a range of professional services focusing on valuations for business sales, mergers, and acquisitions. He's also a business broker, and he and his partners have sold businesses in a wide array of industries. We're talking about necessary steps to prepare for the sale of your business.
Mike Bankus thanks so much for staying with us through the break. I want to talk now about some of the details. I want to get into some scenarios or hypotheticals. Let's talk about the methods that your company uses, and that you're familiar with to appraise a high potential start-up with no revenue. Is there a way to really do that and how accurate can you be? For example, let's talk about maybe an online company with $500,000 invested in web development. We've got positive revenue, no profitability, but high growth in the future. Is that something that's easily done? Is there a special way, or special method that you use to appraise those types of businesses?
Mike: Yes, it's not easily done but it can be done. I actually have two clients that are what I call developmental stage similar to what you described. A lot of times these companies are operating at a loss. But there's projections and potential for future profitability. In those cases what we're really doing is we're looking at, how much has been put into the business today, not just in terms of dollars or investments that have they built something of value. If it's a business, that's web based or they could be valuing the software that they've developed. If it's biopharmaceutical there could be value in maybe they're at a certain stage of a drug testing. We would look at what do we think the value is today, and there are ways to get at those numbers. But then also we would ask management where's the company going and we can base the value off of the future projections. We call that discounted cash flow. One of the top things with that is how credible are there projections, and a lot of times management's very rosy, they have rose colored glasses. We would kind of call it hockey step projections. The numbers are just going up, up, up, and up. There's ways to do it. It's challenging and a lot more times it's art and science but there's a way to do it.
One of the top things with that is how credible are there projections, and a lot of times management's very rosy, they have rose colored glasses. We would kind of call it hockey step projections.
Jeff: Mike have you ever been on the selling end of one of those types of ventures where you have someone approach you about a business like that, and they're interested in buying a business like that? What has been your experience as a broker in dealing with those types of situations, if you have?
Mike: Yes, actually there was a sale a few years ago of a company that is in the medical staffing business and they were just as I described, they're in the developmental stage. They was some revenue but it wasn't robust. They were operating at a loss. But they had some key assets that the buyer was interested in. One of those assets was a corporate shell. So what they can do is a publicly traded company, my client was, and the buyer wanted to buy that shell. But when they went to us so it would be publicly traded once they owned did. And then my client decided they also had a few other assets. They had some good accounting systems in place. They had some good administrative procedures in place. There were assets there that were of value of to a particular buyer. In that scenario my client, the seller, they we're able to realize some funds, some money, rather than just shutting it down because it was losing. It was a good deal.
Jeff: There were some intangibles and some tangibles there that really went along with that company while they weren't exactly interested in the organization as a whole that really brought some value to that deal, and that the buyer was really interested in. Let me ask you just to kind of get your feedback on language now Mike. I'm talking about the type of language that you might find in a buy-sell agreement pertaining to the value of the business. Getting the business appraised in the future in the event of a potential issue. What are your thoughts about language or comments like that in a buy-sell agreement?
Mike: The key with that really is the more detailed the buy-sell agreement is, the better. In other words you'd want to look at several different scenarios in the buy-sell. Now what happens if the shareholder departs, or they voluntarily leave? What if the shareholder is fired, or if there's a dissent? Typically only a minority shareholder could be fired but that happens. You want to address what happens with death or disability. There's a lot of different scenarios as to... Let's just call these triggering events. That's really where a lawyer needs to step in because we're not lawyers and we can help talk about situations we’ve seen that need to be addressed in the buy-sell. But the actual specific language really is a legal issue and we need help with what are some of those events. Ultimately it’s something for the attorneys to draft.
Jeff: The buy-sell agreements, those are really recommended when you're talking about a company that has multiple owners, is that correct?
Jeff: Is there ever an occasion when a buy-sell agreement isn't necessary? I'm assuming that it might be in all cases, but have you ever seen a situation where you’ve had a company come to you and say we’re ready to sell. “My name is Stan and this is Steve here. We each own 50% of the company.” They don’t have a buy-sell agreement but they’re ready to go ahead and pull the trigger. Do you typically ask, "Hey, look, you've got to go ahead and put one of these together right now. There needs to be some kind of agreement here that we can see before we move forward."
Mike: In that situation, shareholders are going to buy the other out. I don't think a buy-sell agreement would be crucial once you get to that point. We just probably would want to focus on what's the value of the company. But as I'm talking about this and thinking about it, the sale process is multi-month, multi-year. I'm going to switch base a little bit and say, they might want to put something together just in case they changed their mind. Again, we're talking about death or disability, something can happen to one of these individuals. It's always good to have that in place to take the burden off your heirs and survivors.
Jeff: Also too Mike, I'm just kind of thinking, we've talked about the importance of having maybe revisiting on an annual basis, the appraisal of your business, or the value of your business. And having that value of your business updated continually, or at least on a regular basis so that you have a real good idea of what you might be able to fetch in the event that you have to sell your business. Financial statements and financial records obviously come into play. And if I want to buy a company I'm going to want to know everything about it. I'm going to want to do my due diligence. And you would think that for the owner selling that company that it is going to also be in their interest in order to keep the sales process moving smoothly and as quickly as possible, that they would want to have all of their bookkeeping and accounting, and all those records in order and taken care of. As a business owner, should I really go out and from time to time consider maybe hiring an outside firm to come in and conduct an audit of my records just to make sure that everything is straightened out, my books are kept, and I'm doing the right thing? So that if I have to sell my business tomorrow, next week, or next month, whatever the case maybe, I'm going to be good in shape from a record standpoint.
Mike: Good question. Records are important. In this day and age a lot of companies are able to keep their own books. There are those programs out there like QuickBooks that even companies with $10 to $15 million of revenue use. Now, an audit as a specific level of engagement with a CPA, there's actually different levels of engagement and an audit is the highest. And one step below that is called a review which is self-explanatory, it's more of a review. And then the level below that is a compilation, which I've only just described as the CPA putting his letterhead on your financials, there's really that much work data or much work reviewed.
To answer the question directly, an audit is not crucial because that's really going to happen during the tax filing process. The accountant or CPA is going to be in there looking at the books, reviewing the books, and you're going to get that function, or that process done through that channel. But it's not say that for business it gets under the $15, $20, $25 million range, an audit might be beneficial. I just signed-up a client that's doing about $30 million of revenue and they may have an audit. It really helps other parties besides potential buyers. It's good for banks, it's good for lenders, it's good for vendors, creditors, and an audit gives companies a certain amount of prestige because not everyone does an audit. There's no hard and fast rules. But let's say for businesses under $15 million, it's not as crucial and it can be expensive down the line. At the end of the day it's going to be a judgment call for the business owner, but it's not crucial.
One step below that is called a review which is self-explanatory, it's more of a review. And then the level below that is a compilation, which I've only just described as the CPA putting his letterhead on your financials, there's really that much work data or much work reviewed.
Jeff: Take aways from our discussion today, or maybe some things that we did not touch on, some things that you really think that business owners need to be mindful of in order to prepare even for that eventually down the line, maybe 10, 15, 20 years down the line for selling their business, things that you'd like to leave people with from our discussion today?
Mike: Number one, have a plan in place even if you don't think it's a detailed or a good plan, just meet with your team at least once a year, your financial adviser, your CPA, your attorney. If you have a business adviser or a business broker meet with that person as well. Another take away is at least quarterly take some time away from your business to do some strategic planning - where is the business at, where is it heading? Do we have to make some changes? Maybe cut a certain product line, use a different distribution channel. Another take away would be what kind of talent is inside my organization, i.e. is there a way I can build some depth of management, hire some vice presidents, or hire some people below me. We see a lot of business owners doing two or three roles. They're trying to save money but at the same time if they add some people on and have that additional expense covered through additional revenue that can make their company more robust. It's a lot of hours. They don't want a business that's 100% of the owners. So they're afraid if the owner goes away the business goes away. It's challenging to run a business and to own a business. But most entrepreneurs are intelligent and it's a good thing they can figure it out and position their business for success and a good sale.
Jeff: Mike, if anyone has any questions for your where can they reach you?
Mike: Okay, I'll give you two information pieces, phone is 484-557-6644. Email is firstname.lastname@example.org.
Jeff: Very good. Mike Bankus we've run out of time and I want to thank you so much for taking time out of your day to join us here for this discussion on Deal Talk. Hopefully we can have you back on again soon.
Mike: Thanks Jeff, it was a pleasure. I've enjoyed it very much. Thank you.
Jeff: You're welcome and thank you. Mike Bankus, principal at Goriano Experts and Advisors.
Deal Talk is presented by Morgan & Westfield, a nationwide leader in business sales and appraisals. If you'd like more information about buying or selling a business call Morgan & Westfield at 888.693.7834 or visit morganandwestfield.com. And make it a point to check in with us again soon for valuable information and insight from our growing list of small business experts on Deal Talk. My name is Jeff Allen and I'll see you again soon.