Seller Expectations and Repricing Issues

Seller Expectations and Repricing Issues

With a lot of activity in the market, 2020 is off to a fast start, promising to be another strong year for the sale or acquisition of privately owned companies. As always, serious sellers and buyers with the right motivation and reasonable expectations will succeed.

This month, we want to revisit the topic of buyers “repricing” an offer and how that can impact the seller’s expected transaction prices. We’ll illustrate what repricing is, how it happens and how it might impact the seller’s expected sale price.

It’s extremely important that sellers know upfront that the repricing of a deal is a possibility and what situations might require repricing. Being blindsided by an unanticipated repricing issues in the midst of the transaction process can be a potential “deal killer”.

Let’s go through a simple example to illustrate.

Disclosure: the following is a hypothetical illustration to show how repricing issues can impact the final deal price; results will vary depending on facts and circumstances

What Is Repricing

Repricing is a common occurrence and part of the normal transaction process. Repricing issues are real issues that need to be resolved (negotiated) in order to complete the deal, otherwise the deal could fail.  Repricing issues generally occur when the buyer completes their due diligence and finds issues that, in their opinion, should reduce the transaction price, a.k.a. repricing.

Seller Expectations  

Sellers need to have realistic expectations regarding the potential business value and that includes an understanding of possible repricing issues. Consider this typical scenario:

  • Bob decides to sell his business because he has realized it’s time to do what he wants to do or for some other ‘the time is now'” reason – but he has not really prepared to sell
  • Someone (a friend or associate) tells Bob that your price businesses “3 times the cash flow”
  • The past results are:

  • So Bob determines his sale price is  $1,500,000    (3 times $500,000)

 

Repricing Issues

After some time, Bob finds a potential buyer who has offered $1,500,000.

But, while completing their due diligence, they discover 2 significant issues that, in their opinion, result in a repricing of their offer (a reduction from Bob’s $1,500,000 price).

They meet with Bob to review the repricing issues with the intent to renegotiate (reprice) the original price. The two issues they discover are:

    1. A need for working capital required to run the company
    2. The need to update company assets (equipment, vehicles, technology etc)

The buyer has determined (in their opinion) the additional cost (investment) for these issues are:

    1. Working capital needed:  $100,000
    2. Investment needed in capital assets:  $300,000

You can see where this is headed… the buyers are going to revise their offer (reprice) and expect Bob to accept the revised purchase price.

Sellers Expected Deal Price – Repriced

How does this impact the sellers expected sale price?

Seller’s expected sale price (above)                      $1,500,000

Buyer repricing adjustments:

blank  

 

Bottom Line:

  • Bob wasn’t aware of the issues that a buyer may object to and based his decision to go to market with a transaction price of $1,500,000 based on a formula that didn’t really consider the many factors that determine a solid price

Where do Bob go from here? Can the parties renegotiate the deal price or is the repricing significant enough to kill-the-deal and the deal fails (worst case)?

 The Takeaways

  • It is very important to work with an advisor who has experience with the business sale process and can properly value your business.
  • Buyers will search for repricing opportunities during their due diligence; it’s one of the reasons they do their diligence – it’s just part of the transaction process.
  • Keep cool: if the business price needs to be negotiated, it’s usually just a hurdle not the end of the process. But the issues can be resolved if both parties want to get the deal done and are negotiating in good faith

NOTE TO SELLERS: Owners who reinvest in capital assets, stay current with maintenance schedules and properly manage cash flow will be rewarded in the ultimate deal price. Those who don’t, won’t … it will cost you.

With experienced advisors by your side, we assure you that  a proper price will be set based on  facts and figures and,working together, most issues can be resolved to everyone’s satisfaction and the deal can go forward.

We’re here to help you with your transaction planning and our consultation is free with no obligation.

This article was written by Eddie Davis C.P.A, C.V.A., Partner at Harvest  Business Advisors.

Contact:  EDavis@HarvestBusiness.com or 301-325-7687


Clients choose Harvest Business Advisors for our sage advice on profitably growing their business, accurate business valuations, and when the time is right, a consistent ability to deliver a high price as part of a smooth exit transaction.
Harvest Business Advisors provides business brokerage, business valuation, and business succession planning services. We have extensive experience in the information technology and professional services, manufacturing, distribution, and contracting fields. We maintain offices in Maryland, New Jersey and Virginia. Connect with us at info@HarvestBusiness.com or 877-838-4966 to discuss selling your business, ordering a business valuation or buying a business.

Benchmarking in 2020 – Key Business Metrics to Monitor

Benchmarking in 2020 – Key Business Metrics to Monitor

As you start the new year, it’s advisable to pay attention to areas of your business to identify problems, resolve issues and measure growth.

Business owners at all stages should follow benchmarking practices – but owners considering selling their business soon or in the future should be especially vigilant.

Likely, you already track some performance metrics in your business, such as profit and EBITDA. While profitability and EBITDA are very important, there are others that many business owners overlook.

Let’s look at some metrics that are equally valuable.

Gross Profit Margin Per Revenue Source and Service

Business owners should review each revenue component whether it be products or services and analyze both the revenue and expenses associated with each. They should also really look at the 80/20 rule in terms of the gross margin per revenue or product.

When is the last time you really studied or analyzed each one of your product or service areas based up on gross margin contribution to the company – including all costs associated with each revenue source? Does a revenue source have disproportionate expenses?

Are these expenses worth the revenue that it brings into your company?

Are there expense components that can be bettered utilized in other parts of your business?

Studying your profit margins across your spectrum of products and services is crucial in bettering your company’s profitability.

Monthly Recurring Revenue Metrics

It is very important to the profitability and value of your business to provide services with monthly recurring revenue. If you do have recurring revenue, you should analyze the cost associated with that revenue (client acquisition, service expansion upgrades, client churn) and understand what percentage of your customers you are keeping, what percentage you are losing and why.

If you do not currently have services that provide monthly recurring revenue, now is the time to put creativity, thought and effort to develop that side of your business

Labor Loaded Gross Margin

If you are running a service business and you have a lot of clients, you need to examine the cost associated with generating gross margin.

Pay attention to which clients demand a disproportionate amount of attention and resources. By looking at profit margins you’ll be able to identify which clients are receiving too much time.

Effective Hourly Rates Spent Servicing Clients

It’s necessary to understand exactly how much it costs to service a client. Once you determine that figure, you’ll know whether you need to charge more. It’s certainly not a good business practice to lose money on a client.

If you can’t make money on the client, then you may need to fire that client or have a frank discussion with the client. So, calculate this metric for each client, analyze the results and increase your monthly fees when necessary.

Customer Contribution/ Client Concentration

While large and loyal customers are an asset to your business, customer concentration of too many large clients (in relation to your total customers) can be a red flag when you are raising capital to expand your business or selling your business. Keep track of customer concentration so that your customer portfolio is in balance and that your customers are evenly distributed across your customer base.

Client Churn Rate

How many clients do you lose each month? And why?

You should be tracking this statistic in your business. Some churn is inevitable but a sudden decrease in customers means you need to take a look at your business. Is it an employee issue? A product or services issue? Are you losing business to a competitor?

The sooner you identify the issue and act to correct course, the quicker your business will recover and rebound.

Employee Churn Rate

Your employees are your biggest asset.

Are you retaining employees? If you are not, why aren’t you?

Is it because of ineffective managers?

Lack of training? What can you do to better train your employees?

What can you do to cut down on this rate?

Are your compensation plans competitive? Are you rewarding and recognizing your employees?

How do your employees stack up against your competition?

Conversion Rate

How many client leads do you actually convert into new clients? Generating leads is great but a good conversion rate is critical to the success of your business. It’s also important to understand lead source and testing new lead generation strategies when necessary.

Return on Investment

Any time you spend money in your business should be done with the intention of calculating the return on both the soft (employees, etc.) and hard (actual cost of goods – equipment, software, web development, social media, online branding, supplies, etc.) to generate that income. Understanding this information – and making adjustments based on it – is critically important..

Conclusion

There are many metrics to choose from in running your business. The most important thing is to choose the ones that will benefit you the most in growing and maximizing profits for your business. And, in the end, using good metrics will pay off for you when its time to exit and sell your business. Buyers do pay more for well-run businesses with strong processes in place.

 

This article was written by Harvest Business Advisor Partner, Richard Stopa.


Clients choose Harvest Business Advisors for our accurate business valuations and our proven ability to deliver the highest price in the smoothest sale transaction possible. Harvest Business Advisors provides business brokerage, business valuation, and business succession planning services. We have extensive experience in the information technology and professional services, manufacturing, distribution, and contracting fields. We maintain offices in Maryland, New Jersey and Virginia. Connect with us at info@harvestbusiness.com or 877-838-4966 to discuss selling your business, ordering a business valuation or buying a business.

 

 

Five Common Questions Business Sellers Ask Business Brokers

Five Common Questions Business Sellers Ask Business Brokers

The three partners at Harvest Business Advisors – Greg Caruso, Eddie Davis and Richard Stopa – have helped hundreds of business owners sell their businesses. Each business sale process is unique – but the questions we are asked by the owners remain fairly consistent.

1. When should I sell my business?

Sometimes this question is in response to changes in the economy or the stock market. Or an owner is feeling discouraged about sales or challenges in the business.

The answer is “It Depends”. We do not have any special forecasting skills to help you make a decision. But we can tell you that business sales usually take 9-18 months, so selling is not a quick fix to a downturn.  While your business is on the market, you will need to continue to run your business, upgrade systems, keep an eye on profit opportunities, document processes and keep key employees engaged. It’s essential for the sale of the business.

Other times this question is in response to internal or personal changes. We hope you are not dealing with health issues, but if you are, the time to plan is now. If you are not as satisfied running your business, an exit planning session can help set goals so you know you have options, if and when you decide to sell your business.

 

2. How much money will I get?

This is another question without an easy answer. But realize that pricing is an art form – too high and all the buyers will be chased away, too low and you will not receive full value. It’s important to have a business valuation to establish a baseline value which will help you to determine how to price your business.

Be prepared for bargaining from buyers (that’s their role!). It’s not meant to demean your business, but it is part of the process.

 

3. Who would buy my business? How do I find buyers?

Usually, business owners think about competitor who might want to purchase their business. And we see that happen quite a bit. It’s an easy way for a business to expand their client base, their equipment and personnel. But that is certainly not the only option.

Business brokers try to look at complementary businesses who would grow their business in a new direction. An example would be a landscaping company who purchased an irrigation company. Or a law firm who acquired a consulting firm that could expand the services they provide their clients.

We also use professional associations to find businesses and business owners who are aligned. Sometimes there is an employee who is ready to be their own boss (sometimes that employee works for you!)

Business brokers, especially those who have been in the business for a few years, develop relationships with people looking for the “right” business and investors who are seeking profitable businesses to invest in. We also focus on finding more than one potential buyer, to develop an “auction” atmosphere (and a higher selling price).

4. What do I tell my employees? And when?

Long before you decide to sell your business, you should protect yourself by having your key employees sign Non-Disclosure Agreements (so they do not discuss the details of your business with anyone outside the business) and Non-Compete Agreements (so they cannot work for a competitor for a specified period of time). Both of these agreements can be customized to be fair and equitable to you and your employees.

We generally recommend not telling your employees the business is for sale until the sale is final, with the exception of key employees who may need to be involved in the due diligence process and meet with the prospective buyers. Guaranteed, your employees will know something is going on. The best you can do is present the business sale as a positive for them, an opportunity for growth.

5. What will I do after I sell my business?

There’s a question we cannot answer! After a transition period with the purchasers, most “former” business owners take some time getting used to their new normal. Some spend time improving their golf game or finding new places to fish. Others make up for lost time with their families. We’ve seen people buy an RV and hit the road – or discover a passion for giving back in their communities. The bottom line is, after your business is sold, you will decide what is next, what will make you fulfilled and happy.

 

If selling your business is on your mind, we’d be happy to talk to you about what to expect and the options and timing.  We can have a relaxed conversation by phone or over coffee to answer some of your questions. Feel free to reach out to us!


Clients choose Harvest Business Advisors for our sage advice on profitably growing their business, accurate business valuations, and when the time is right, a consistent ability to deliver a high price as part of a smooth exit transaction.

Harvest Business Advisors provides business brokerage, business valuation, and business succession planning services. We have extensive experience in the information technology and professional services, manufacturing, distribution, and contracting fields. We maintain offices in Maryland, New Jersey and Virginia. Connect with us at info@harvestbusiness.com or 877-838-4966 to discuss selling your business, ordering a business valuation or buying a business.

Business Owner Succession Plans Should Consider ESOP’s

Business Owner Succession Plans Should Consider ESOP’s

ESOPs or Employee Stock Ownership Plans should be considered as a succession tool by business owners.

When business owners first start to consider the possibility of retiring or transitioning away from day to day operations, many look around them to see who might be a potential buyer. A family member or a friendly competitor or an allied business frequently often come to mind. But perhaps owners should consider their employees as potential buyers.

An ESOP is an Employee Stock Ownership Plan. In the right circumstances,  ESOPs can be a great succession planning tool.  ESOP’s receive extremely favorable tax treatment.  But they are not suitable for every situation and can be somewhat complex and costly.

They often work well if an owner wants to stay involved but obtain asset diversity by selling perhaps 1/3 of the business.  There are strong tax advantages.  When set up properly both the loan principal and interest is deductible for tax purposes.  Note, usually only loan interest is deductible for tax purposes.  This is a huge advantage.

An ESOP may be set up with existing cash from the plan sponsor’s balance sheet but are usually leveraged.

  • The loan may be from a bank or other financial institution or the selling shareholder may finance the transaction by taking back a note for part or all of the purchase price
  • The plan sponsor usually uses its balance sheet to secure the debt financing
  • Often the owner must guarantee to loan to the business.  Sometimes this guarantee can be limited in time and amount.

The ESOP borrows the money to purchase company stock (outstanding shares, new shares, or treasury shares) which is held in trust for the benefit of the employees.

  • The company makes tax-deductible contributions to the ESOP to enable the ESOP to repay the loan
  • As the loan is repaid, shares held by the ESOP are released and allocated to employee accounts
  • The employee shares are held in trust.

More information about ESOP options can be found at National Center for Employee Ownership or connect with Harvest Business Advisors to discuss your options – email info@harvestbusinessadvisors.com or call 877-838-4966.

 


Clients choose Harvest Business Advisors for our accurate business valuations and our consistent ability to deliver a high price as part of a smooth exit transaction.
Harvest Business Advisors provides business brokerage, business valuation, and business succession planning services. We have extensive experience in the information technology and professional services, manufacturing, distribution, and contracting fields. We maintain offices in Maryland, New Jersey and Virginia. Connect with us at info@harvestbusiness.com or 877-838-4966 to discuss selling your business, ordering a business valuation or buying a business.

How To Sell Your Business, Part Eight — Closing the Sale

by Greg Caruso, JD, CPA, CVA and Partner at Harvest Business Advisors

Once the negotiations have been completed, the transaction moves to the closing stage. During this time, final price adjustments are made to take into account any last minute inventory additions or deletions, accounts receivable, pro-rated operating costs and any other variables that may arise. Also at this time the purchase agreement and any loan documents are assigned. Leases, contracts and titles are transferred, and new agreements such as non-competes are signed.

 

Transfer of Licenses  This very often involves a liquor license but many different types of businesses and professions require a license.  In some instances, the license transfer occurs after settlement.  Before the sale process starts, all required licenses and the transfer requirements should be identified and investigated.  Factor these requirements into both your sale schedule and preliminary qualifications for a Buyer.

Franchiser or Supplier Approval and Disclosure  A Hallmark Store is not worth much if Hallmark does not approve the Buyer and does not agree to ship inventory to them.  Again, check out the requirements prior to starting the sale process.  Many franchisers and suppliers have written standards, or they will give you oral standards, so you can qualify your prospects.  These standards may be both financial and academic.

Bank Financing Approval  Bank approval, particularly SBA bank approval, can be a frustrating challenge.  It requires careful coordination and constant pushing by the borrower, and it is important to get all documents to the bank as quickly as possible.

Unfortunately, the nature of underwriting is that one document request generally leads to another.  If a typical loan process requires five additional document requests (not abnormal), and each request takes two days for you to complete and three days for the bank to review and make a new request, then the detailed underwriting will take about five weeks.  If it takes you five days to produce the information, then the process stretches to eight weeks.

Keep pressure on the bank and produce the requested documents as quickly as possible.  It also pays to start with a professional bank package.  If you do not know how to prepare one find a loan broker, consultant, or accountant who can help you get it done right.  A professional appearance is worth the price and effort.

Landlord Approval  Leases need to be assigned to the new Buyer.  Landlords always retain the right to approve this.  Depending on your landlord, this can be the easiest approval or next to impossible.  Unfortunately, the landlord with whom you started your business may not be the landlord who approves your lease transfer.  While most leases call for reasonable approval (but not all, check when you start the process), reasonable can be a very difficult thing to prove.

Many Sellers do not want to look into this until they have a Buyer but it really makes sense to investigate this in the beginning.  Some landlords routinely charge a small fee to transfer leases.  More than one has tried to raise the rent and take a percentage of the sales price when approached.  Receiving a lease assignment may be very difficult if your landlord is greedy and the property location is in demand.

Closing Adjustments  Often inventory and other balance sheet accounts (if being conveyed or assumed) will be adjusted as of the settlement date. It makes sense for a third party company to take inventory.  They will come in and get the job done in hours instead of the days it will often take you.  You do need to be present to look up costs, and the Buyer should also be there to verify the process.  You want the Buyer involved and to perform reasonable due diligence.  Now is the time to solve problems, not through a lawsuit after closing.

In fact, your attorney should try to obtain a clause in the contract which states, “the Buyer has been able to perform all investigations desired including but not limited to appraisals, environmental investigations, inspections, accounting reviews and testing etc., and is buying the business based on the results of those investigations and not on preliminary information and summaries provided.”

Transaction Expenses . Everything is negotiable but typically in our market the Seller picks up the brokerage fee.  The Buyer pays the loan costs, taxes, and recording expenses.  The parties split the settlement and closing costs.  Both parties pay for their own counsel.  Generally the Buyer pays part of the Seller’s legal fees if the Seller is taking back financing. They would pay an outside lender for this so, if the amount is reasonable, covering the Seller’s legal expense for loan documents is reasonable too.

Document Review We firmly believe that, prior to the time of settlement, all terms and conditions should have been agreed to and reviewed by the parties.  In general, your attorney will sign off on the format and wording of the final documents.  If third party financing is involved, signing off will be very last minute as often the bank documents and final fees are the last items to arrive – sometimes an hour or two after you intended to start closing.

Closing and Settlement Some Buyers and Sellers keep negotiating right up until the pens are placed down and the check exchanged.  If you must do this, remember that next week you may need something from the other party.  Business sales are different from real estate transactions in that businesses have many moving parts and many people involved.  In typical real estate transactions, after closing, the Buyer and Seller have very little interaction.  With business transactions, the interaction may continue for years.

You should receive copies of all documents.  Some attorneys prepare elaborate closing packages and forward the documents, including the sales document, all exhibits, a worksheet for the money, loan documents, and legal conveyance documents etc., several weeks after settlement.  While somewhat expensive (someone is paying for it), these packages are helpful when questions arise later.

 


Clients choose Harvest Business Advisors for our accurate business valuations and our consistent ability to deliver the highest price in the smoothest sale transaction possible. Harvest provides business brokerage, business valuation, and business succession planning services. We have extensive experience in the information technology and professional services, manufacturing, distribution, and contracting fields. We maintain offices in Maryland, New Jersey and Virginia. Connect with us at info@harvestbusiness.com or 443.334.8000 to discuss selling your business, ordering a business valuation or buying a business.

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