Tim Kinane

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Posts Tagged "Buy Sell Business"

Thursday, October 15th, 2020

Company Sales Rebounding Despite COVID-19

By: Patrick Ungashick

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The COVID-19 pandemic brought many aspects of US society and business activity to a halt in March of this year, including sales of small to mid-market companies. Yet already there are signs that mergers and acquisitions activity (M&A) is rebounding for small to mid-market companies, an encouraging development for business owners who seek to exit from their companies by way of sale to an outside buyer. The emerging increases in company sales come after deal value in the US fell by 20 percent in the first half of 2020 to according to PitchBook Data. Deal value declined by one-third in the second quarter alone.

Buyers and sellers are coming back into the market, after pumping the breaks when the pandemic first hit. First, many companies have been largely unaffected by the pandemic. Other companies have adjusted their operations and are returning to profitable growth despite the ongoing public health challenges. Additionally, the upcoming US elections have spurred many business owners to resume exit planning out of fear of tax increases in the future.

Overall, the volume of sales of small to mid-market companies remains below pre-pandemic levels. However, signs point to the need for business owners to be ready to sell as the “window” reopens. In response, we recently published a new whitepaper, “Top 10 Signs You are Not Ready to Sell Your Company,” to assist business owners during these uncertain and changing times. Download a free copy to review if you and your company are ready to sell, or what it takes to get you prepared.

 

Contact Tim 772-221-4499, to discuss strategies for your business.

Friday, September 4th, 2020

Top 10 Signs You Are Not Ready to Sell Your Company

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Between COVID-19, a recession, and the aging of the US Baby Boomers, the number of business owners seeking to sell their company at exit will only increase in the future.

While every company is unique, there are ten universal signs that indicate if your company is ready (or not) to sell and maximize value. Our newest White Paper, Top 10 Signs You Are Not Ready to Sell Your Company, presents these ten signs, and just as importantly provides guidance and resources on how to prepare for a successful sale.

Click here to download this complimentary resource from NAVIX.

Contact Tim 772-221-4499, to discuss strategies for your business.

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Friday, August 14th, 2020

Maximizing Company Value: Tracking EBITDA During COVID

By: Patrick Ungashick

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If your exit strategy is to sell your company one day for the maximum value (perhaps as soon as possible once the COVID-19 recession is over?), then it is essential to track your company’s EBITDA accurately. (Read our previous article about EBITDA and how it directly impacts your company’s valuation at the sale.) However, the COVID-19 pandemic and economic recession have significantly altered many companies’ financial results and condition. The virus is causing many companies to experience “abnormal” changes to revenue, costs, margins, labor, debt, and other financial and operational factors. Many companies are experiencing negative changes such as lost revenue and profits due to the virus’ impact, while others are experiencing positive demand for their products and services. Either way, the virus is altering many company’s financial results, which means adjusting the EBITDA. Some of the changes are temporary (non-recurring) and expected to revert to pre-COVID-19 conditions at some point in the future. Other changes may be more permanent.

When you decide to sell your company, it will be crucial to have accurately tracked your EBITDA and its changes through these unusual and unprecedented times. Potential buyers will want to know how COVID-19 impacted your company’s financial performance. They will also want to be able to clearly and readily convert your company’s financial results to show how the company likely would have performed during normal operations and market conditions. Because buyers typically ask for five years of historical financial reports, it is essential to track EBITDA now whether you aspire to sell your company quickly or anytime within the next five or so years.

There are many ways COVID and the recession may be creating unusual changes within your company’s financial results. Below are some of the more common issues that you and your management team may need to address:

 

1.Temporary Increases / Decreases to Revenue or Profits
Due to COVID-19, some companies may see a surge in demand for their products leading to an increase in revenue and profits. Examples might include companies dealing with products or services in the following areas: medical and health, cleaning and sanitary, home entertainment, transportation, and delivery services, and other industries. Conversely, other companies may be experiencing a reduction in the demand for their products or services, leading to lost revenue and profits. Examples include markets such as hospitality and leisure, travel, luxury goods or services, and others. In these situations, you and your team should monitor demand, revenue, and profits to identify how much, of the lost or increased volume, relates to the current conditions and is not expected to continue after the virus and recession have passed.

 

2.Business Facility Disruption
Many companies were forced to close facilities such as offices, manufacturing plans, distribution centers, etc. due to COVID-19. These disruptions likely result in lost EBITDA. Owners and their management teams should, track any business disruptions and document the duration and root causes, to facilitate analysis of the company’s financial results for the periods before and after the relevant shutdown. Additionally, track operating expenses that were reduced or not incurred when determining the normalized EBITDA.

 

3.Expenses to Support Remote Work
Many businesses incur increased expenses associated with the shift of workforces from company facilities to work-from-home (WFH) routines. Examples of these costs include improved information technology (IT) expenses and equipping employees with additional computers and other equipment and supplies to support remote work. Owners and their teams should identify and track these expenses and purchases to support remote working. Also, track any positions likely to remain WFH going forward.

 

4.Reduced Employee Compensation and/or Headcount
Many companies severely impacted by COVID-19, and the current recession have reduced employee compensation, and/or reduced employee headcount through lay-offs or furloughs. Owners and their teams should track employee compensation and headcount pre-COVID-19 and post-COVID-19. Also, consider any costs associated with severance payments and other employee termination costs. Use this information to normalize the company’s EBITDA for the period.

 

5.Increased Bad Debt Expense
Many companies are experiencing an increase in aged accounts receivable (A/R) as customers delay payment due to the virus and recession. Also, other companies may be experiencing increases in bad debt expense resulting from customer bankruptcies. Business owners and their management teams should closely monitor A/R aging and collections to stay in front of any potential issues with customer payments. 
Careful consideration should be given to modeling future customer revenue for specific lost customers and plans to recapture lost revenue by channel/geography.

 

6.Stretching Payments to Vendors
In an effort to conserve cash, many companies are stretching payments to vendors, landlords, leaseholders, etc. This practice leads to increases in aged accounts payable (A/P) and higher A/P balances. In some situations, stretching payments can result in lost early pay discounts if previously available and utilized. Carefully monitor the business’s payables, consider normalizing higher than usual A/P balances and significantly aged payables, and impact to EBITDA.

 

7.Government Loan and Bailout Programs
Since the COVID-19 crisis first hit, many companies have taken advantage of various government loan and bailout programs which are not normally utilized in the regular course business. The most widely used program among small to mid-market companies has been the Paycheck Protection Program or PPP. These programs invariably have stipulations such as retaining certain levels of employees and their compensation, and other expense management requirements. Business owners and management teams must consider and normalize the impact of any loan or bailout programs on the company’s earnings and consider normalizing the impact.

 

The seven items listed above represent only some of the more common issues that companies may be experiencing due to COVID-19, which alter EBITDA. There are many additional issues to monitor and track, such as changes to the company’s: pricing of its products and services, discretionary expenses, cash management practices, business development operations and results, employee attendance, and absenteeism. Ultimately, owners and management teams need to study and accurately track the company’s EBITDA and other financial results during these unusual times. Staying on top of these issues is essential not only for the effective leadership of the company but also for correctly positioning the company for sale when that day comes.

Contact Tim 772-221-4499, to discuss your specific EBITDA questions or your overall exit plans. If you intend to sell your company as your exit strategy, consider registering for our webinar “Eager to Sell Your Company when the Market Returns?” . During this webinar, we will discuss the steps that business owners need to take now, to position the company for sale and maximize value when market conditions return to favorable.

Friday, October 4th, 2019

Three Biggest Oops Inside Buy-Sell Agreements

By: Patrick Ungashick

Buy Sell Agreement Document

 

Your company’s buy-sell agreement may be one of the most important legal documents in your life. It may not seem or feel that way most of the time, but if and when you need that agreement, it can either save you huge sums of money and incalculable stress and suffering, or it can cause you to lose huge sums of money and suffer incalculable stress. The outcome depends on whether or not your buy-sell agreement is well designed, or not. And, unfortunately many buy-sell agreements make one or more of several surprisingly common mistakes.

Quickly – What is a Buy-Sell Agreement

Buy-sell agreements (also commonly called shareholder agreements or member interest agreements) are legal documents that identify situations where ownership in the company may change hands, and then provide instructions on how to handle each case. The most familiar example is what happens upon the death of a partner. A buy-sell agreement usually requires the deceased owner’s heirs to sell the interest back to the company or the surviving owner(s) and at a specified price. This provision protects everybody: the deceased owner’s heirs receive a cash payout while the remaining owner(s) move forward without unwanted business partners. Most buy-sell agreements have provisions to address a shareholder’s death or other triggering events, such as retirement or severe disability.

Mistake #1 – Not Address the Sale of the Company

The first common mistake deals with a triggering event that many buy-sell agreements do not address—the sale of the company. If you wish to exit by way of sale, but one or more of your co-owners don’t want to sell, typically you cannot make them sell their portion of your company if your buy-sell agreement does not directly address this scenario. So, if a co-owner does not want to sell, then you might not be able to sell either. Most buyers will not want to acquire less than 100% of a company, particularly, when one of the owners was already opposed to the deal.

This reality often comes as an unwelcome surprise to owners seeking to exit. Some owners only learn their partners can block a sale when a potential buyer is standing in the doorway, and they discover that the buy-sell agreement does not address a sale. This omission leaves business co-owners at risk. To fill in the gaps, be sure your agreement includes “drag-along” and “tag-along” rights. These odd-sounding provisions bind co-owners together when selling the business to an outside buyer. The “drag-along” part requires that if a majority of the owner(s) decide to sell the company, all of the other owners are required to join the deal. This clause protects majority co-owners against minority co-owners holding up a sale. “Tag-along” is the reverse—majority co-owner(s) cannot sell their interest without tagging along and including the minority owners at the same price and terms. This stipulation protects minority co-owners from being left out of any deal. Together, these provisions bind all the co-owners into a single block and restore the majority owner’s control over the decision to sell the entire business.

If you wait until a buyer is standing in your doorway to address this, you run the serious risk of undermining or killing your deal.

Mistake #2 – Inadequate Valuation Method

The second common mistake is the buy-sell agreement uses a valuation method that produces an undesirable outcome or price, or both. Every buy-sell agreement will have some provision for determining the value of the company (or a partial interest in the company) upon a triggering event. There are several commonly used methods, with the three most common being:

  • Defining a fixed price (“The company is worth $10 million”)
  • Setting a formula (“The company is worth five times EBITDA”)
  • Calling for and performing a formal business validation upon a triggering event

It is possible to define reasonable scenarios where any of these methods would be a good or a poor fit to accomplish what the business owners need. So, while some professional advisors will clearly advocate one approach over another, each method offers significant advantages and disadvantages, so there is no one-size-fits-all answer to which valuation method should be used.

Instead, owners (and their advisors) must do two things on this issue, both of which commonly get overlooked. First, the different valuation methods need to be discussed and carefully weighed to determine which fits best for your situation. This analysis rarely gets done, which is both dangerous and unnecessary because the question typically only takes a little time to evaluate and answer.

Second, the valuation method selected today needs to be reviewed and updated over time. Frustratingly, that rarely happens. Few owners get excited about “reviewing and updating my buy-sell agreement” as a project or task, for understandable reasons. However, over time, the valuation method used in your buy-sell agreement likely gets less and less current and relevant to meet your new reality. Then, one day, a triggering event occurs. At that point, it’s too late to make a change, and the obsolete valuation method or price can do more harm than good.

Mistake #3 – Bad Form

Exactly how does the buy-sell agreement work upon a triggering event is crucial, and there are different forms of agreements. For example, assume one owner dies. The buy-sell agreement calls for the deceased owner’s heirs or estate to sell that interest in the company, as you would expect. However, how will that purchase occur? For example, does the company purchase the deceased owner’s interest? Or, do the remaining owner(s) acquire the interest? Or can they split it? The buy-sell agreement’s form will answer this question, and the question typically has significant financial and tax considerations.

The different types of buy-sell forms typically include:

  • Entity purchase (the company buys back the stock or units)
  • Cross purchase (the remaining owners buy the stock or units)
  • Wait-and-see (a combination of the two)

While there are exceptions, in most situations, a wait-and-see method offers the most advantages with few if any disadvantages. Ironically it seems to be the least commonly used form in our experiences. Under this method, the legal agreement does not predetermine who or what will be the buyer—the agreement will “wait and see.” The legal document usually accomplishes this by giving the business the first option to purchase the interest within a narrow window of time, such as thirty days. If this time period expires with no purchase, then the option shifts to specified individuals (such as remaining owners) to make the purchase. If these individuals do not purchase the interest within the second time period, then usually the agreement concludes that the third and final step is the business must purchase the interest. The wait-and-see sequence (easy to remember as Business-Owners-Business or BOB) gives owners and advisors flexibility to determine the best course of action upon a triggering event.

Avoiding Oops

Buy-sell agreements are critically important documents that, when triggered, can either cause a disaster or rescue you from one. You cannot afford to wait until a triggering event occurs, to discover that the agreement is lacking in some way.

If you have questions about your agreement, contact us for a complimentary and confidential consultation to discuss or review your existing agreement. Better to know about and fix a small oops now.

 

If you have a quick question coming out of this article or, if you want to discuss your situation in more detail, we can set up a confidential and complimentary phone consultation at your convenience contact Tim 772-221-4499.

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