E4: The Entrepreneurs Advocate

Why get a 3rd Party Business Appraisal before going to Market? An Exiting Perspective…

1.The Buyer’s lender will demand one and there is a good chance yours will match the one subsequently ordered by the Entering buyer’s bank. Do you only want an appraisal from the buyer’s and lender’s perspective?

2. Pre-financing can be arranged for the potential Entering buyers of your business. This also gives you insight into the buyer’s capacity and character. If the Entering buyer (key employees or outsider) is not credit worthy, precious time is not wasted and the ensuing confidentiality risk is minimized.

3. You are in control of the selling price. What more needs said?

4. You are in control of potential buyer’s offering price and their perception of your business. Remember, your business only gets one chance at a good first impression.

5. If the Appraisal comes back lower than your Exiting Strategy needs, steps can be taken to improve your businesses cash flow before it is too late. You do not want the rude awakening that could come from an educated buyer’s low-ball offer.

6. You are in control of the buyer’s team of advisors. In addition, data gathering during the appraisal process can reveal any potential due diligence problems that could arise later.

7. Your business will stand out versus the poorly presented businesses for sale. Remember, your business is competing against other investment opportunities that potential buyers are investigating. The certified, third party appraisal makes your business look more appealing and professional.

8. We live in a litigious society. The certified, third party appraisal is your best weapon against buyer’s remorse and any charge from the buyer that they overpaid.

9. A rule of thumb appraisal or one done by a member of the Exiting team could be seen as tainted. A potential buyer will discount the asking price if a qualified certified, third party business appraisal is not done at arms-length.

Banks Tightening Credit brings Business Exiting Preparation Front and Center

SBA backed loans are down 31% in South Florida. The new SBA SOP (standard operating procedures) have made the rules more onerous for Entering clients and prospects. A constant refrain we hear from banks is we would have done this deal a year ago. In the past we would have placed loans with 1-2 target banks and typically that was good enough. Now we place packages at 3-5 lenders and are constantly researching new lender’s risk parameters and appetite for loans by market segments.

This is toughest borrowing market we at Bankers Advocate have seen in in 10-15 years. What steps can you take to make sure a lender will fund your transaction?

• Books and Records Current and Error Free- Many posts in this blog harp on this subject, but it is even more important in this tough lending environment.
• All Loans Now Require a Business Plan- A good idea before becomes a requisite now. Much of the data gathered during the third party appraisal process can be used in a business plan. Having the data will make this go smoother and faster. Also, it is a good learning and team building exercise for the Entering and Exiting entities to work on this together.
• Third Party Evaluations Required-We have never taken an assignment without one being done. It is good to see the SBA back us up.
• Source of Equity-Rules have tightened on borrowing monies against your house and other assets. Coverage on this new debt cannot be only covered by the cash flow from the new business. Verification of funds by the lender has been made stricter too. Documentation and analysis needs done prior to the loan being submitted.
• Change in Ownership must Benefit the Business-This is a tricky one, but we can help write the narrative for the loan documentation.
• Exiting Seller Financing-Lenders like to see the Exiting  party “invested” in the process. Some amount of seller financing is encouraged  and even required on some deals by the SBA.
• Experience of Entering Buyer-A good resume, track record and tying this together with a good business plan is paramount. This needs addressed early in the process as this variable has become a deal breaker.

Deals (and loans) are still getting done, but planning, structure and choosing the correct lender(s) is even more critical in these challenging times. 

Selling One Location or Part of your Business?

We are getting more calls from potential Exiting clients wanting to sell part of their business; two stores, one clinic, a manufacturing plant, etc.

A big road block to this is that many times the books and records are not setup to reflect “subsidiary companies”. In addition, the CPA has been providing the client a compilation or tax returns with no regard for analyzing the different profit centers of your business.

There is good chance that the potential Entering party will need financing. Lenders typically want three years of tax returns plus year to date financials. How can this be overcome? Your CPA can go back and build three years of reviewed and YTD financials of the “subsidiary” you want to sell.

On a side note, what is the difference between a compilation, a review and audit? A CPA may provide a client with three distinct services involving financial statements. Each is designed to meet a different need.

A compilation is useful to small, privately held entities that need help in preparing their financial statements. A review, on the other hand, may be adequate for entities that must report their financial positions to third parties, such as creditors or regulatory agencies. Reviewed financial statements may also be useful to business owners who are not actively involved in managing their companies. An audit is the third and most extensive service. An audit is appropriate for entities that must offer a higher level of assurance to outside parties.

You would need to invest in at least a review to separate your company’s different parts. Also, it is very important that your internal accounting and record keeping be corrected so that going forward your company is not continuing to co-mingle the profit centers.

What about your employees-both direct and indirect? Who stays with what entity? How are the marketing and advertising dollars allocated? An Entering party is looking to buy a company with solid systems and procedures. Will splitting your company affect costs and synergies? Conceivably.  These variables need addressed before going to market.

If you are thinking about Exiting part of your company, a solid plan needs to be devised and implemented. If not, your efforts could be futile. I hope this short post gives you food for thought.

IRS Increases Mileage Rates through Dec. 31, 2008

This was recently posted on the IRS website. Of course every little bit helps, Chris.

IR-2008-82, June 23, 2008

WASHINGTON — The Internal Revenue Service today announced an increase in the optional standard mileage rates for the final six months of 2008. Taxpayers may use the optional standard rates to calculate the deductible costs of operating an automobile for business, charitable, medical or moving purposes.

The rate will increase to 58.5 cents a mile for all business miles driven from July 1, 2008, through Dec. 31, 2008. This is an increase of eight (8) cents from the 50.5 cent rate in effect for the first six months of 2008, as set forth in Rev. Proc. 2007-70.

In recognition of recent gasoline price increases, the IRS made this special adjustment for the final months of 2008. The IRS normally updates the mileage rates once a year in the fall for the next calendar year.

“Rising gas prices are having a major impact on individual Americans. Given the increase in prices, the IRS is adjusting the standard mileage rates to better reflect the real cost of operating an automobile,” said IRS Commissioner Doug Shulman. “We want the reimbursement rate to be fair to taxpayers.”

While gasoline is a significant factor in the mileage figure, other items enter into the calculation of mileage rates, such as depreciation and insurance and other fixed and variable costs.

The optional business standard mileage rate is used to compute the deductible costs of operating an automobile for business use in lieu of tracking actual costs. This rate is also used as a benchmark by the federal government and many businesses to reimburse their employees for mileage.

The new six-month rate for computing deductible medical or moving expenses will also increase by eight (8) cents to 27 cents a mile, up from 19 cents for the first six months of 2008. The rate for providing services for charitable organizations is set by statute, not the IRS, and remains at 14 cents a mile.

The new rates are contained in Announcement 2008-63 on the optional standard mileage rates.

Taxpayers always have the option of calculating the actual costs of using their vehicle rather than using the standard mileage rates.

Mileage Rate Changes

Two Exit Planning Seminars this Thursday & Friday

Later this week on June 19th in Ft Myers and June 20th in Ft Lauderdale, I am participating in two Planning Your Exit from Business Ownership Seminars. BB&T, Ruden McClosky and Richard Hall CPA are my gracious sponsors. Whether you want to Exit your business in six months or six years, this factual and hard hitting four hours of material will give you the information you need to make one of the more important decisions in your life.

Don’t worry, you won’t be sold or asked to buy anything. I half kiddingly tell all attendees that my only goal is that you will see that the Exiting Process is so complicated you dare not do it without professional help (of course I hope you consider Bankers Advocate). Some of the topics discussed will be:

•    STRUCTURE YOUR BUSINESS for a Successful Exit…
•    IMPROVE THE BOTTOM LINE Profits until you Sell…
•    SUCCESSFULLY SELL your Business…
•    DEAL with CONFIDENTIALITY ISSUES….
•    RECEIVE MAXIMUM VALUE for your Business…
•    HOW to Sell to FAMILY or KEY EMPLOYEES…
•    AVOID TAX & LEGAL PITFALLS in the Process…

We have a few spots still available for both Seminars. Readers of this blog can still get the early discount rate if they RSVP by this Tuesday night. Call the office at (561) 882-1331. I hope to see you there.

Government Contracts May Put Struggling Companies on Road to Recovery by Robert Koehler

Establishing a plan for sales to the government may be the business opportunity a company needs to turn around lagging sales or expand the scope of its marketing footprint. In the most recent Journal for Corporate Renewal (The official magazine of the Turnaround Management Association), there is an interesting article on looking to government sales to pull your company out of of a sales doldrums.

As someone who funded many minority and women owned companies selling to the government when I owned a factoring company, selling to government entities can be both profitable and fraught with peril. First, figure out what you want to sell. Second, compute your dead costs FOB where the government entity wants the product or service. Third, do a budget with a great deal of “fudge factor” included to know your total monies out of pocket before you get paid. Fourth, even if you don’t need working capital, find a funder who has government experience to act as your partner for the first six to twelve months of transactions. Lastly, make sure you have enough gross margin after all costs (including the cost of funds) to make it worth your while.

Being on a Non-Profit Board: “Give, Get or Work”

Like me, you probably serve on a few non-profit boards. Giving of yourself can be very rewarding, but sometimes frustrating in the non-profit arena. A key difference between your business and the non-profit is that when you serve a client, the profits that are subsequently generated increase resources. When the non-profit serves a client, resources typically are consumed and must be replenished by outside sources.

When I took my first non profit board seat many years ago, I thought I was there to share my insight and knowledge ;).  I slowly learned that guidance, strategy and the fiduciary duty are important, but there are three critical roles that need played. You either:

Give Money, Raise Money and/or Do Critical Work

In a new or under capitalized non-profit these areas are magnified. As you look at your board make up, slot all the members (including yourself) into each category. My guess is that there is some dead wood who do none of the three. Their main job is to “pontificate”. They need to go unless their insights rival Peter Drucker’s. If you are lucky, you have an even mix of all three areas. If you are really lucky, you have a few superstars who fall into 2 or 3 of the categories.

Look for balance in the board makeup. To many of one or not enough of any of the three board member types can lead to problems. Too many pontificators will lead to failure and ruin.