Resources: Articles

Key Points: Offer to Purchase Customarily used for individual buyers Is normally binding Often includes an earnest money deposit Does not usually include a “no-shop” provision Letter of Intent (LOI) Used for corporate buyers Usually non-binding No earnest money deposit — a larger buyer has already made a significant investment in investigating the business, so we usually don’t require an earnest money deposit. Usually includes a “no-shop” provision, which means you have to take the business off the market and you can’t sell to another buyer. What happens after the offer or LOI is accepted Once you accept the LOI or offer, due diligence begins. You can extend the due diligence time frame, if need be. The purchase agreement is prepared and negotiated during the due diligence period. The offer/LOI is replaced by the purchase agreement. Focus on running your business, even after you have accepted an offer. Don’t let revenues slip, or the buyer will likely reduce the offer. In some cases, the parties may prepare a term sheet before preparing an LOI or offer. The LOI/offer doesn’t contain the necessary language for a closing (it’s replaced by a purchase agreement prior to the closing); however, it allows both...

What are reps and warranties, and why are they so important? When selling my mid-size business, what do I need to know before signing a purchase agreement containing representations and warranties? Reps (short for “representations”) and warranties are statements of facts regarding a company’s business, assets, liabilities, and operations. They can relate to the past, present or future, and are included as one of several critical clauses in a purchase agreement. A representation is a statement of fact. If a representation is untrue, it is “inaccurate.” For example, a seller may represent that the assets of the business are in good repair, that all inventory is salable, that there are no hazardous substances used in the business, that the business has operated in compliance with all laws, or that the seller has the legal capacity to sign the purchase agreement. A warranty is an assurance. If a warranty is untrue, it is “breached.” For example, a seller may warrant that they will operate the business in a regular and normal manner and will comply with all laws until closing, or that they will pay all payroll taxes that will come due from past operations up to the time of closing....

Fun fact: In 2020, almost half of Amazon’s sales came not from Amazon directly but from third-party sellers. And two-thirds of those independent sellers -- or more than two million retailers worldwide -- used Amazon’s FBA (Fulfillment by Amazon) platform. With FBA, sellers of products are able to tap into Amazon’s order fulfillment and shipping services to distribute their wares. Hence, the FBA mantra: Sellers sell, Amazon ships. This information in this article is for owners of Fulfillment by Amazon businesses or those teaching others how to sell on Amazon. Some of these principles will apply to Amazon Delivery businesses, but delivery businesses tend to operate more like local brick-and-mortar shops (albeit with a heavy dependency on Amazon). If you’re a seller of widgets, FBA might be the service for you. If you’re thinking about selling your widget-selling FBA business, Morgan & Westfield is most definitely the service for you. Check it out ... Table of Contents Minimum Requirements for Selling an Amazon FBA Business Prepare Your Amazon Business for Sale Reduce Dependency Increase Barriers to Entry Maintain Clean Financial Statements Create a Comprehensive Training & Transition Plan Develop a Persuasive Reason for Sale Prepare for Due Diligence Build Infrastructure...

A prerequisite to understanding how to value your company and how to increase the value of your business is understanding how buyers think. This article will take you into the mind of a potential buyer of a technology or software company and provide you with an overview for why they make acquisitions and what is important to them when they are considering making an acquisition. Having knowledge regarding the underlying drivers of M&A activity in the technology marketplace is also helpful to accurately predict long-term trends within your industry and broader macroeconomic trends that may affect the value of your business. This knowledge can be used to manipulate the drivers of value for your company -- in other words, knowing what impacts the value of your company helps you maximize the value of your software, tech, or online business. It’s important to understand industry dynamics since that’s what drives acquisitions. There are two important things to take into consideration: Demand for Software: The demand for software in general will continue to increase, which will increase the overall volume of acquisitions. This will continue to make software companies attractive as acquisition candidates. The Cycle of Innovation: It is important to understand...

Business Description: B2B Software for the Transportation Industry Let’s take a field trip! Today, we will look at the details and the decision-making process that went into preparing a specific company for sale in the competitive world of software providers. The subject company in this case study is a B2B software provider in the transportation industry that integrates multiple functions for fleets, such as accounting, scheduling, and payroll. The industry is fragmented, with sufficient room for niche products, and is not a winner-take-all market, as is the case with many industries in which software is sold. The majority of the company’s revenue is generated from a recurring quarterly support fee. The owners are retiring after operating the business for three decades. They wish to sell before a competitor introduces a new innovative product that may end up dominating the market, thus rendering their software obsolete and destroying the value of their business. The market is fragmented but ripe for consolidation, possibly by a large competitor who could vertically integrate software in the industry, or by smaller, more agile competitors who could out-innovate the company’s software and their value proposition. Where to start? With the value drivers, of course ... Table...

In a recent survey, Consumer Reports found that a “modern/updated kitchen” still rules when it comes to ideal home features among home buyers. When it comes to shoppers of tech, software, or other online businesses, recurring revenue is the most attractive enticement. And just as there are any number of other actions you can take to increase the value of a house -- finishing a basement and painting high-traffic areas come to mind -- there are steps you can take to enhance the value of your tech, software, or online business. These actions are called "value drivers," and in this article, we'll discuss the top ones. Specifically, we will: Introduce you to the theory and importance of value drivers. Outline the top drivers of value that can impact the value of your tech, software, SaaS, or online business. Identify specific steps you can take to improve the value of your business. What are you waiting for? Table of Contents An Introduction to Value Drivers An Important Note on the Range of Values A Note on General Preparedness for Technology Businesses Value Driver #1: Increase Recurring Revenue Value Driver #2: Document Comparable Transactions Value Driver #3: Prepare a Buyer List Value...

There are many factors to take into account when it comes to calculating the value of a company. The process gets even trickier if it’s a tech, software, or online business. The procedure for valuing any business is the same: calculate its SDE or EBITDA and then apply a multiple. In some cases, a tech business may be valued based on revenue. However, multiples are significantly different for tech, software, and online companies. And the factors that affect the multiples are different as well. Those considerations include: Scalability of the business Levels of risk and how they are addressed Recurring revenue Contracts The company’s growth rate The condition of the online code, and The cost to replicate the business. In the following article, you’ll learn about the various valuation processes and formulas, and the steps you can take to increase the value of any tech, software, or online company. Ready when you are ... Table of Contents The Valuation Process for Tech, Software & Online Businesses Valuation Formula for Tech, Software & Online Businesses Method #1: Multiple of EBITDA Method #2: Multiple of Revenue Deciding Which Method to Use EBITDA Multiples for Tech Businesses Factors that Affect the Multiple Factor...

Most people think hiring an attorney is only necessary when there is a problem. However, the best time to seek an attorney’s advice is when you are starting the process of selling your business, when you are thinking about buying or starting a business, and before there is ever a problem. That’s the advice of Hanwei Cheng, senior counsel of Ed Lee Law Group PC in Los Angeles. Cheng made the remarks in a recent podcast that addressed a common question posed by first-time sellers of businesses: Why do I need to hire an attorney? Here’s a partial transcript ... “Most business owners who end up in lawsuits thought they had everything under control. As an attorney, I see this time and time again; a business owner who thought they understood the terms of the sale, but are now being sued because of the ‘fine print.’ “As an attorney, what we do best is problem-solving, so we can anticipate certain contingencies that may arise and we try to prevent those issues before they actually happen. Once those issues arise, that's when hiring an attorney becomes expensive. By then, the business owner has found himself knee-deep in litigation, and hiring a...

Certified Public Accountants come in many forms. Some focus purely on doing taxes at the end of the year while others prepare financial statements, manage payroll, assist owners in preparing their businesses for sale, assist prospective buyers in obtaining loans to buy businesses, and more. Additionally, there are CPA firms that have become a one-stop shop for all of your financial needs. Regardless of the situation, there are three things you can do to make sure you find the best CPA for your business. 1) Communication Skills This may seem obvious, but let’s delve into what it actually means. This goes beyond whether you can get through to your CPA when you try to call them, although this is an important first step. When you do talk, do you understand what they are saying? Many CPAs use jargon when speaking to clients, which may sound impressive but does not help them understand what is going on with their finances. Find a CPA that can explain things to you in layman’s terms. 2) Ask for References This is KEY to finding the right CPA for your business. Many business owners believe that just because a person has the title “Certified Public...

You don’t have to search too long to find opinions alleging that M&A destroys value. NYU Professor Aswath Damodaran goes as far as to say that asking an investment bank to fairly value an acquisition target is akin to “asking a plastic surgeon to tell you your face is perfect.” When the so-called father of modern valuations is so vehemently against the practice, one might wonder why the volume of M&A transactions continues its upward trajectory. Context is required here. Firstly, most academic studies on M&A use event studies to measure the success of transactions. That is, when news of the transaction is publicly released, we assume the stock market’s response to be a gauge of the success or otherwise of the deal (success, as always with the stock market, being a translation for “future earnings”). There’s at least one major flaw in this, which even academics will admit to -- it assumes that the stock market makes the right call all the time. Secondly, to give some context to Damodaran’s remark, he’s not arguing against the logic of M&A transactions as much as this may appear to be the case. His argument is based on the problem inherent in...

Just as real estate prices rise and fall, so can rental rates. Have you tried negotiating your rent with your landlord to no success? Is your current rental amount above market rates? Do you own an unprofitable business in which it would not be feasible to continue operations without a concession from the landlord? If you’ve answered any or all of those questions in the affirmative, read on to learn what you can do to improve your chances of success. Spoiler alert: Everything’s negotiable. Table of Contents Reasons the Landlord May Lower Your Rent Prerequisites to Negotiating a Lower Rental Amount Reasons the Landlord May Not Lower Your Rent How do I Approach My Landlord and Try to Reduce My Rent? By how Much Can I Reduce My Rent? What is the Difference Between a Deferral and an Abatement? How Long Do the Negotiations Take? For how long will the Landlord Reduce the Rent? Reasons the Landlord May Lower Your Rent If the landlord doesn’t lower your rent, you may be forced into bankruptcy. The business is break-even or barely profitable. The landlord believes it may be difficult to replace you as a tenant. Your rental rate is above the...

Morgan & Westfield helped sell Imago Dei, a creative art service firm with stable revenue growth, using a combination of bank and seller financing. The company was positioned in the market to target non-industry buyers and corporate executives with management or marketing experience. This allowed Morgan & Westfield to widen its pool of potential buyers. Our marketing strategy generated 106 buyer inquiries, and the business was sold in approximately ten months. Morgan & Westfield’s in-house appraiser increased the sale price by $75,000 by doing an internal review of the business appraisal performed by an independent party on behalf of the bank that financed the transaction. In this case study, we share with you a comprehensive look at how -- and why -- that deal went down. Table of Contents The Seller’s Background The Company The Assignment Seller’s Goals Team Pricing Strategy Key Value Drivers Positioning and Packaging Marketing Methods Process and Results The Deal Conclusions and Lessons Learned Client’s Profile The Seller’s Background Jeremy Wells is a serial entrepreneur and an artist who comes from a family of entrepreneurs. He started Imago Dei in 1999 in Ventura, California. He and his wife, also an artist, moved the business to Houston,...

Did you ever get to the top of the diving board, only to “chicken out”? That feeling of trepidation is not unlike what many buyers of small businesses experience, which often causes deals to fall through at the 11th hour. Sometimes after months and months of information-gathering and other due diligence. In this article, we take a look at wary buyers and other potential deal-killers, along with how to minimize their impact or prevent them altogether. Let’s start with the most common deal-killer of them all... Table of Contents Deal Killer #1: Inaccurate Financial Statements Deal Killer #2: Landlord and/or Lease Deal Killer #3: Buyer Fear What Happens if the Buyer Fails? Why Does any of this Matter? Tips for Managing the Buyer’s Fear Deal Killer #1: Inaccurate Financial Statements The number one deal killer when selling your business is inaccurate financial statements. While inaccuracies in financial statements can stem from hundreds of sources, the antidote is simple. Make sure your financial statements are accurate and up-to-date. And be sure to have the necessary backup material to support your financials (bank statements, receipts, invoices). The best option is to retain a third-party accountant or CPA to review your financial statements....

Day #1 “I have a buyer who contacted me last week and is interested in buying my business. I want to see what happens with this buyer before I do anything.” (Seller talking to us) Day #5 Seller talks to the buyer, and they schedule a meeting for next week. Day #11 Seller and buyer meet, and the meeting goes great. Seller calls us and says, “I think he is going to buy it. I want to hold off before we do anything else.” Day #13 Seller calls the buyer to move the ball forward. No answer. Seller leaves the buyer a voicemail. Day #16 No answer from the buyer. Seller calls buyer again and leaves a message. Day #20 Still no answer from the buyer. Seller calls a third time and leaves a message. Day # 25 No answer from the buyer yet. Seller calls a fourth time and leaves a message. Day #28 The seller calls us, exhausted, and doesn’t know what to do. We hear this story all the time from our clients. What has happened here, and what can be done about it? Why do interested buyers disappear? Buyers are like everyone else -- they’re busy...

What are the three most common mistakes business owners make when valuing their business? Valuation Trap #1: The Unnecessarily Complex Valuation Trap Most business appraisals are written for those involved in litigation or other legal matters. These appraisals use complex language that is difficult to understand and include methods that are of little practical relevance to a business owner wishing to sell. If you are selling your business and you want a valuation, is an appraisal right for you? If so, what type of appraisal should you get? Valuation Trap #2: The Third-Party Valuation Trap Several business appraisers offer their appraisals through a network of business brokers. These networks actively market their services to business brokers, charging as little as a few hundred dollars to the brokers, while the brokers may charge their clients what they please. Should you pay for a third-party appraisal? Valuation Trap #3: The Free Valuation Trap Why do business brokers offer free valuations? Should you trust an appraisal that you receive for free? The appraisal obviously plays a key role in determining the value of your business. That’s why it’s important to not waste time and money on unnecessary features and instead focus on what...

There are nine critical valuation concepts you should understand before valuing your business: Fair Market Value vs. Strategic Value Most business appraisals use fair market value (FMV) as the standard of value. Strategic value is the value of a business to a specific buyer. It can represent a value in excess of FMV to a specific buyer of a business, usually a strategic buyer. The primary downside to strategic value is that you cannot measure strategic value until you know who the buyer is, because every buyer is able to extract a different amount of value from the transaction. Should you use FMV or strategic value to appraise your business? Small Market vs. Middle Market The methods used to value a small business (less than $5 million in revenue) are different from those used to value a middle-market business (more than $5 million in revenue). Which method is right for your business? Business Valuation is a Range Concept The range of possible values for a business is wider than for other investments such as real estate. The M&A Market is Inefficient Some markets, such as the real estate market, have a ready supply of highly comparable transactions. The market for...

Getting divorced? Going bankrupt? Seeking a loan? Getting sued? Planning to sell your company? At some point, an event will likely occur during the time you own your business that will trigger the need for a business appraisal. Once you determine you need an appraisal, there are several important questions to ask yourself: Why is this being valued? When do I need it valued? What exactly is being valued? What type of appraisal do I need? The fact is all appraisals are not created equal. Valuations prepared for legal purposes -- such as taxes, legal disputes, and damage cases -- are affected by a complex array of federal and state laws and legal precedents which rarely impact the value of a business for M&A transactions in the real world. We can’t save your marriage but we can point you in the right direction when it comes to getting your business appraised in preparation for a sale. In the article that follows, we take an in depth look at each of the questions above. Table of Contents #1: Why am I Getting my Business Valued? The Purpose Determines the Methods Purposes and State Laws Purpose and Standard of Value Most Appraisals...

If you needed an operation, would you seek out a general practitioner or a surgeon who’s successfully done the procedure a thousand times? Yes, the GP might have a broad understanding of your medical issue and what it would take to get you on the mend, but when it comes to actually fixing what ails you -- whether it’s a hernia operation or a heart transplant -- it’s always best to use someone who’s been there before. Preferably, many times before. The same principle applies to getting your business valued and appraised. There are various types of appraisals but when it comes to selling businesses, we highly recommend that you use someone who’s got a successful track record of actually getting businesses sold. Preferably, lots of them. Here’s what we suggest: Tip #1: Use Methods Buyers Use in the Real-World When valuing your business for purposes of a sale, it makes sense to use valuation methods that are used in the real world by the types of buyers most likely to buy your business. Otherwise, your appraisal will be of little use to you. Tip #2: Hire Someone Who has Real-World Experience Selling Companies If you are planning the sale...

Making the decision to sell your business is one of the most important choices that you will have to make as a business owner. Selling prematurely can lead to unexpected surprises in due diligence, lower valuation by prospective buyers, and even an inability to close the sale. Here are eight signs that your business may not be ready to be sold. If you are planning to sell and one or more of these apply to you, dedicate some time to resolving these issues -- it will make all the difference. You May Not be Ready to Sell Your Business if: All of the information necessary to run your business is in your head. Your business should be able to run without you. This involves streamlining, automating, and documenting your processes. Your financial documents are not in order. Inaccuracies in financial statements are a red flag to potential buyers. There can be no cutting of corners when it comes to the business’s financial statements. Get your documents in order well before you ever plan to list your business for sale. Pre-sale due diligence has not been performed. Once you have accepted an offer, the buyer will perform due diligence, which will...

Congratulations on the decision to sell your business. As with any complex multistep process, you should begin at the beginning -- starting with preparation. Preparation makes execution look effortless. Considering that the sale of your business will likely be the largest sale you will ever make in business, it is foolish to neglect preparation. Unfortunately, only a small proportion of business owners plan their exits by giving this major life decision the thought and attention it deserves. Why? Most entrepreneurs have a strong bias toward action. Once they have decided on a course of action, they prefer to dive right in and figure things out later. You must realize, however, that a lack of preparation will extend the time frame of the sale, reduce the cash you put in your pocket, and lower the chances of a successful transaction. Every exit is different, and each exit must be planned. There is no templated process you can follow to prepare your business for sale. The preparation stage involves reviewing a number of steps, prioritizing those steps, and then taking action on those steps. Regardless of your position, be forthright with us regarding how much time you can spend preparing your business...

According to recent studies, the average seller has to talk to 40-plus buyers to sell their business. That’s a time-suck if there ever was one. Moreover, many sellers also quickly get frustrated when buyers do not return phone calls or emails or randomly just disappear during the sale process. Fortunately, there’s a better way. A method that’s efficient and highly effective. It starts with drawing up a fact sheet known as a Confidential Information Memorandum (CIM). A CIM provides pre-screened shoppers with answers to basic questions about your business before they even get a chance to ask. You don’t want your CIM to be an open book, mind you. The idea is to give qualified buyers just enough information to whet their appetites so that they’ll want to know more. CIMs are one of our specialties at Morgan & Westfield. In the article below, we outline the most common questions asked by buyers, along with a suggested table of contents that you can use in drafting your own CIM. Read on for complete overview of the process. Table of Contents Why Can’t Buyers Just Come Look at My Business? What is the Most Efficient Way to Sell My Business? This...

How do I maximize the value of my business? Start by making it appear less fungible. You can’t necessarily retool your product line overnight, but you can identify and promote specific aspects of your business that give you -- and the new owner -- an edge. Fungibility is the ability of individual units of a good or a commodity to be substituted for one another. Essentially, it means the goods are interchangeable. For example, one $10 bill is interchangeable with any other genuine $10 bill or with any combination of bills and coins that add up to $10. Fungible commodities include water, food, precious metals, and, possibly, your business. So, what does fungibility have to do with your company? In business, a fungible asset is one that can easily be substituted for another asset. For example, machinery may be considered a fungible asset in certain types of businesses. Labor may also be considered fungible in certain industries. In the world of mergers and acquisitions, a fungible business is one that can be easily substituted by the acquisition of another business. For example, if a buyer is purchasing a business solely for the cash flow it generates, then that buyer can...

What are the steps I’ll need to take to sell my business? It’s a complicated process but you can simplify the procedure with a plan and increase your chances for a successful sale by properly executing each step of that plan. The Process of Selling a Business -- The Seven Steps Prepare a confidential information memorandum (CIM). A CIM is a written overview of your business that answers key questions nearly every buyer will ask. Confidentially market your business. When selling your business, determine if the ideal buyer is an individual, competitor, or private equity firm; then create a plan that’s customized to attract your targeted buyer. Screen buyers and email them your CIM. Most buyer inquiries come through email. Include basic information about your business and ask the potential buyer to sign a non-disclosure agreement (NDA) before you send them your CIM. Share information and meet with qualified buyers. Share your CIM and normalized financials with interested buyers. If the buyer asks a few follow-up questions, answer them. If the buyer sends you a long list of questions, set up an in-person or phone meeting. Negotiate and accept an offer. Ask the buyer for a letter of intent (LOI)....