Mergers & Acquisitions

Resources: Interviews with Industry Experts

Our goal at Morgan & Westfield is to provide you, our readers, with high quality information and valuable resources to help you navigate through the process of buying or selling your business. In this section, we provide interviews from various professionals somehow involved in the process of buying or selling a business.

Rick Adamy

CPA/ABV, ASA, CBA

Today we have the opportunity to interview Rick Adamy, a CPA and the founder of Adamy Valuation Advisors. In this interview, Mr. Adamy gives us an overview of several very important topics, including: valuations, equity value, working capital adjustments, earnouts, enterprise value, private equity groups and a venture capital groups. If your primary goal is simply to get the best price, watch two things: market multiples and what’s going on in your industry. Published data on market multiples show history and current levels. The market is strong right now, recovering from the low point following the recession.


Key Points from our Conversation

  • Selling what might be your most valuable investment dictates a good business appraisal.
  • Work with your appraiser or other advisors to get the business “dressed up for sale.”
  • Start early. One of the biggest mistakes is to decide today that you need a deal done in few months.
  • If your primary goal is simply to get the best price, watch two things: market multiples and what’s going on in your industry.

Interview

Tina: How will I know when it is a good time to sell my business?

Rick: If your primary goal is simply to get the best price, watch two things: market multiples and what’s going on in your industry. Published data on market multiples show history and current levels. The market is strong right now, recovering from the low point following the recession.

Developments in your industry will also influence price. Some industries grow hot and cold and don’t necessarily follow overall market pricing trends. For example, one of the hottest industries right now is raw food processing.

All of this assumes your business is actually positioned to sell. There is a long list of readiness issues such as successor management, customer concentration , internal systems and controls, and facilities condition and capacity, to name a few. How will buyers view your company? If you’re not sure of the answer, it’s probably not time to sell.

Tina: How long should it take to sell my business?

Rick: Six months is about average, but there is a wide range. If all parties are motivated and focused, it can happen in three months. It isn’t uncommon for issues to arise and drag it out to a year.

Timing shouldn’t have anything to do with value, unless something has changed about the future outlook.

Tina: I am preparing to sell my business within the next year. Can the timing of when I get a valuation affect the "value" of my business?

Rick: Valuation is about the future. Timing shouldn’t have anything to do with value, unless something has changed about the future outlook.

Tina: Does structuring the sale as an asset or stock sale impact the valuation of my company?

Rick: It doesn’t impact the value but does have a big impact on what you wind up with after taxes. Your advisors can help explain this and structure the transaction for best tax advantages. Sellers usually want a stock sale. Buyers want an asset transaction.

Tina: I am preparing to sell my business and I do not need a full appraisal. Can I hire a business appraiser to just offer me some guidance and help?

Rick: Selling what might be your most valuable investment dictates a good business appraisal. This is not the place to save a few thousand dollars. How can you make an informed decision without an independent appraisal? You may know your business better than anyone, but you are probably not in the best position to independently assess the many areas that encompass a valuation.

Tina: I am only going to sell a minority portion of my business. Do I need a valuation?

Rick: Minority positions typically sell at a discount to control positions. These discounts are usually in a range of 10% to 50%. The level is determined by a list of factors and current market data. Qualified business appraisers have access to these factors and how to quantify them.

Tina: How do I know if my company is ready to be sold?

Rick: This becomes a long list of checkoffs. Leading the list are successor management, history of growth and profitability, diversified customer base, niche products and markets, internal controls and systems, and low employee turnover. Your business appraiser will have a complete list of these value enhancers.

Tina: Can I sell my business to a private equity group?

Rick: Sure. We’ve been seeing more of this for a few years now. PE has a ton of money available from investors seeking to diversify. Mid-size and larger businesses are more attractive to PE.

Tina: Can I sell my business to a venture capital group?

Rick: Yes, but they aren’t usually interested in established businesses. Start-ups and early stage businesses are good candidates.

Tina: What is a Working Capital Adjustment?

Rick: Any business needs a certain level of working capital (usually receivables and inventory ) to operate. If you agree on a price for your business, the buyer assumes an adequate level of working capital will be there when the deal is closed. If not, the buyer would have to invest more money. To avoid that, a set level of working capital is determined in the deal price. If that level is less at closing , the price is adjusted down dollar-for-dollar.

Any business needs a certain level of working capital (usually receivables and inventory) to operate.

Tina: What is an earnout?

Rick: An earnout is a way to get a deal done when parties can’t agree on a price due to future uncertainties. The earnout provides for additional monies to be paid if certain profit or sales goals are met. This allows the buyer to afford a higher price if things go well and avoid overpaying if it doesn’t. Sellers often don’t like this because future control of the business is out of their hands.

Tina: How do I best structure an earnout to make sure I am paid?

Rick: Base the earnout on easily determined and auditable data. Sales are often used for this since profits can be manipulated. Require monthly financial statements to monitor. Have an independent CPA audit the annual amount. Have your attorney make sure the closing documents provide assurance of payment, such as a deposit.

Tina: What is Equity Value? Is this different than Enterprise Value? Do I need to know this if I am selling my business?

Rick: This is one of the most commonly misunderstood areas of valuation. Enterprise value is the value of the business by itself without regard to how it’s financed (with debt, for example). It’s usually based on the present value of future cash flows or EBITDA times a multiple . Equity value is enterprise value less debt and plus or minus any non-operating assets such as cash or investments.

It’s critical that you understand the difference and how it figures into a sale transaction. Your business appraiser can help with this.

Enterprise value is the value of the business by itself without regard to how it’s financed; Equity value is enterprise value less debt and plus or minus any non-operating assets such as cash or investments.

Tina: Will I need to finance part of the purchase price of the business?

Rick: You may have to. This depends on your personal needs and motivation and also on the buyer’s finances. If you can afford to hold out for a cash buyer, fine. Many buyers of small businesses are really buying themselves a job and don’t have funds for a cash deal. Typical terms are 20% down with the balance over 5 years.

Tina: How can I get a premium value for my business?

Rick: Look at the list of value enhancers discussed above. Work with your appraiser or other advisors to get the business “dressed up for sale.” It also helps to be patient. If you don’t like the first offer, wait.

Tina: Do you have any other tips of advice for anyone buying, selling or appraising a business?

Rick: Start early. One of the biggest mistakes is to decide today that you need a deal done in few months. Plan on it taking a year to fully navigate this tricky landscape. If the business needs dressing up, plan for longer, especially if it needs major work.

Get a good team. Besides a business appraiser, you’ll need an attorney and a CPA experienced in sale transactions. This may not be your current attorney or CPA. Don’t be bashful about finding the right people. The long-time family attorney or CPA may be comfortable but not the right person for this job.

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