What Is Your Business Really Worth?
Published in Long Island Business News, June 5, 2017
by Bernadette Starzee
The prospect of preparing a business for sale and arriving at a price may sound daunting, but it's not unlike selling a house.
"We tend to think buying and selling a business is a lot more complicated than it is," said Joe Campolo, managing partner of Ronkonkoma-based Campolo, Middleton & McCormick. "But everyone understands what's involved in buying and selling a house, and it's not that different. It's all about preparation."
Campolo made the house-business analogy during a recent panel discussion entitled "Do You Really Know How Much Your Business Is Worth?" held at Dale Carnegie Training of Long Island in Hauppauge.
"Everybody understands that when you're selling a house, you invest in the kitchen and the bathroom, and the landscaping for curb appeal, and you burn potpourri and play classical music when people come to see it," Campolo said. "If the buyer walks into a house and it's a mess, they won't want it. The same applies to a business."
Just as clean houses sell faster, a business with clean records is attractive to buyers. "If the books are a mess – if you pay your Home Depot bill out of your business account – you're going to have a lot of explaining to do," Campolo said.
How a business is priced depends on many factors, and "the biggest delineator is the people," Campolo said. "Sophisticated buyers will look at the management team. If you are planning to sell down the road, and you have good people, you may want to lock them up now – there is a lot of talent acquisition going on."
Campolo noted that getting good people to sign a non-compete agreement can be a delicate matter.
"You may have this great team, they're like family, and then you say to them, ‘Oh, by the way, sign this non-compete,'" he said, likening the deed to asking a fiancee to sign a prenuptial agreement.
"But you gotta have those big-boy conversations," he said. "When a buyer is doing due diligence, and he sees this salesperson who controls a lot of revenue doesn't have a non-compete in place, he's going to say ‘Uh-oh.' You might trust the worker, but the buyer doesn't. As a business owner, you have to protect your assets."
According to Campolo, there's been a big shift in the merger-and-acquisition market. About 15 years ago, venture capital firms would come in, and they wanted control and would often downsize.
"It has shifted to private equity," he said. "These professional acquirers of businesses are a best friend to business owners – they want to acquire the businesses and the business teams that, if they had more access to capital, would be able to grow. They want you to grow the business; they don't want to take over. But they won't be interested unless people are locked up."
Nonfinancial variables can account for up to about a third of a business's value, said Don Schatz, president of Dale Carnegie Training of Long Island, during the panel discussion.
Nonfinancial variables include organizational strategy. "What really counts is how well you execute strategy, and that comes down to people," said panelist John Shillingsford, a partner at Hauppauge accounting firm AVZ.
"To build an organization takes years; you have to find the right people and cultivate them," said Bruce Newman, president of Protegrity Advisors in Ronkonkoma, who rounded out the four-person panel. "A professional acquirer will look to see if the team in place can save them from having to recruit people for X number of years."
Though there is a wide range of zeroes in business sales, the need to prepare in advance for a sale is consistent throughout all transactions. Another factor buyers look at is scarcity, Newman said. "Does the company have something no one else has?" he said. "Is the brand hard to replicate? Are there patents?"
"There is an emotional aspect when you are selling a business – it's very stressful," Shillingsford said. "We counsel owners to do advance planning to prepare for the sale – being prepared reduces stress and takes the unknowns out of the mix."
Preparedness includes advance tax planning.
"Remember, there are three parties to any transaction: the buyer, the seller and Uncle Sam," Campolo said. "Uncle Sam is often the biggest impediment."
With proper planning, the sale can be structured to avoid large tax penalties. For instance, depending on the circumstances, "you might look at doing it as a stock transaction," Shillingsford said.
Sometimes, there's a fourth person in the transaction: the landlord.
"A lot of businesses don't own their building," Campolo said. "The landlord might see a change of control as an opportunity to get a big windfall and charge more rent. Buyers will look to see if there is a change of control provision in the lease."
Buyers will analyze financial statements and profit-and-loss statements, Shillingsford said. They will look at key performance indicators based on the company's industry, as well as whether the owners are overpaying or underpaying for things like rent.
"Is the company paying below market rent?" he said. "What happens if it goes up?"
The most difficult sell is when revenue is declining.
"We counsel businesses on how to at least get revenue flat or ideally growing before they sell," Newman said.
Campolo said the most disputed issue in transactions is the status of the financials. Sophisticated buyers expect financial statements to be computed in accordance with GAAP (Generally Accepted Accounting Principles), but often they're not when a small, less sophisticated business is selling.
It's currently a seller's market, with more buyers than there are good businesses to buy, Campolo said.
"There's plenty of money out there," he said.
Read it on LIBN: http://libn.com/2017/06/05/what-price-your-business/