Author Archives: Rick Krebs, CPA - Business Valuations, Mergers & Acquisitions
Business Sales Group is pleased to announce the successful sale of a mid-sized MEP Engineering/architectural firm on the East Coast. BSG was a sale-side advisor for the transaction offering valuation and advisory services to the owners. Deal size was under $10 Million. We want to give a thank you to Bob Bowers of CBI Group who was instrumental in getting this transaction to market and across the finish line.
Rick Krebs was recently endorsed by Charlie Fusco to sell a business.
We recently saved Adam and Julie a whopping $1.2 Million when they sold their business. Visit www.CAPSTrust.com for details.
As a M&A professional representing Sellers and Buyers I see a lot of sales structures and deal types. I wanted to share 4 of the most common structures that I see for the sale of a business. These are based on a $1.5 Million Sales Price.
A. All Cash. This is usually paid in full at close, but at a discount from the full Asking Price, usually 10-20%. You could expect to see $1,350,000 – $1,200,000 at Close for a $1.5 Million Sales Price.
Advantages: Quick and you don’t have to rely on a bank for funding. Disadvantages: Buyers generally aren’t willing to pay full price for an all cash structure.
B. Cash with Seller Carry. I usually see 10% Seller Carry so you would get $1,350,000 at Close (for $1.5 M sale) and be paid over time, generally 3-5 years for the remaining $150,000. If the interest rate is 6% the Seller would get paid $190,000 total so they make more money with this, but have to wait 3-5 years for the remaining money.
Advantages: Sellers get more money for their business in the form of interest and can save money on taxes. Disadvantages: Purchasers sometimes don’t pay and Sellers run the risk of non-payment.
C. Earnout. This includes an up-front down payment, usually at least 50% of the Sales Price and then the rest of the Sales Price is earned over time and variable. Using a 50% down scenario, the Seller would get $750,000 up front and be paid based on the profitability of the company over 3-10 years for the rest of the money and potentially “earn” more money for the business.
Advantages: The advantages to this are: Sellers could be paid much more for the business if it does well. This usually works well when the owners are staying to work in the business and not retiring from it at Close. If the business does better than expected, the Sellers get more money for their business over time. Disadvantages: Sellers have to wait to get paid and if the business does poorly under new management. Sellers can get less money than the other options.
D. Seller financing of 100% of the purchase price. This is used most often for a partner buy-out or buy-in. The Purchaser gains ownership from the beginning and his/her share of the profits are used to buy his/her share of the business.
Advantages: A Purchaser can own a business with little or zero down payment. The sales prices is established based on some set criteria negotiated and can be higher than the market price. Disadvantages: Sellers get paid over time versus up front.
Business Sales Group – M&A division is pleased to announce the offering for sale of a Wholesale Distribution Company in the Inter Mountain West. They sell name-brand products to distributors in the US and internationally. Sales for 2018 (projected) are $15 Million. EBITDA is just under $1 Million. For details go to: https://www.bsalesgroup.com/our-listings.
Business Sales Group (small business division) is pleased to announce the successful completion of the acquisition of an Event and Promotional Production Company In Arizona. The Buyer was from the mid-west and hired BSG as his buy-side advisor to advise him through the whole transaction. BSG successfully completed the Business Valuation, Due Diligence, Negotiation, LOI, Accounting and Advising functions for the buyer. Lori from Midwest Bank was big help in making this transaction happen as well. Congratulations to J.H. and his family who will surely help this business excel.
Business Sales Group, Small Business Division, is pleased to announce the successful purchase of Jibij by James Sawyer. With the help of his father, James acquired this excellent business. Rick Krebs was the Advisor for the Buyer (Buy-side Advisory) helping him navigate all aspects of the sale from start to finish including valuation, negotiation, due diligence, licensing transfer, closing, etc.
Jibij is an online retailer of ski, outdoor, and rafting products including well-known brands such as Patagonia, Oakley, Under Armour, Scott, and Volkl. James will certainly do well with this excellent business. Christon and Liz Horstman were excellent sellers to work with and extremely helpful in making this purchase possible.
When considering a sale, it makes sense to do an annual compiled financial statement that is presented on a GAAP basis versus Cash Basis, which is commonly used to report Income on a your tax return. This GAAP financial can then be used for valuing and selling your business compared to using Tax Returns.
The reason for this is you do everything you can to minimize your tax burden. This includes prepaying for expenses, buying inventory at year-end, buying equipment at year-end, etc. to employ tax saving strategies as advised by your tax professional or financial planner.
When preparing to sell, it makes sense to hire a CPA to do a Compiled Financial Statement on a GAAP basis. Why? GAAP tend to normalize income and increase Net Income which increases EBITDA. For example, companies on the NYSE that are publicly traded report on a GAAP basis because it tends to show more Net Income. As a business owner, you learn this the year you are forced to go from a Cash Basis Tax Return to an Accrual Tax Basis Return because you generally pay more taxes in the year you switch over because your taxable income increases. For this reason, taxpayers like to stay report on a Cash Basis for taxes as long as they can or until they are forced to do an Accrual Method by the IRS when they have $5 Million a year in average Gross Revenue.
When you are ready to sell, if you will have a GAAP basis Financials prepared, chances are, you will get more for your business and put more money in your pocket.
When valuing an Orthodontics Practice, two important considerations need to be made:
- Accounts Receivable.
- Accrual versus Cash Basis Accounting.
When valuing an Orthodontics practice, especially if it is a startup and less than 2 years old it is important to consider Accounts Receivable in the valuation equation. For instance, when valuing an orthodontics practice, they typically have AR that can stretch out 24-30 months. If you are using cash basis financials, it is important to subtract out beginning AR and add in ending AR to gain a true reflection of actual revenue
Calculation from Cash Basis Accounting to Accrual Accounting is as follows:
Cash Basis Cash Flow $400,000 $400,000
Add: Ending AR $375,000 $375,000
Less: Beginning AR ($179,000) ($179,000)
Equals Accrual Basis Cash Flow $596,000 $2,096,000
Adding back the change in Accounts Receivable to Cash Flow and Revenue reflects a more correct picture of Cash Flow and Revenue. Orthodontics practices are unique due to the fact that their AR may stretch out for 2-3 years, so it is an important consideration to make when valuing an Orthodontics practice.
There is a type of business valuation software and service available that allows a business owner to input their own financial information. Although this may seem like a good idea, it is a very bad practice. Valuations, like tax returns are complicated and require a seasoned professional to analyze and input the data to get an accurate number for value. One of the main reasons that a business owner would not want to do the valuation themselves is there are key expenses that can be added back into the EBITDA and Cash Flow calculation. If these expenses are missed, the valuation number is inaccurate.
Key add backs and charges tend to be buried in the tax returns or financials and are easily missed. These include:
- Amortization Expense, which is usually shown on the Schedules and buried in the tax return.
- Section 179 Depreciation Expense, which is usually shown on Schedule K-1 of the Tax Return and erroneously added back with the rest of the depreciation.
- Partner Wages and cost to replace the owners for a situation where there is multiple partners who own a business.
- Cost of a working spouse who is not paid.
- Adjusting the lease to the market rate.
- Correct calculation of SDE, EBITDA.
- Repair and Maintenance Expenses that need to be capitalized.
- An S-corp tax return will show more Taxable Income (Net Income) than the P&L due to the expenses and pass through items on the Schedule K-1’s. If the business owner doesn’t understand income and pass-through entity taxation, he will undervalue the business.
- Schedule M-1 on the Tax Return contains important information and business owners tend to not understand how Schedule M-1 works.
Business Valuations are exponentially more accurate if a Valuations Expert or CPA gathers, assimilates, and inputs the critical information pertinent to the engagement to get an accurate value for the business.
The second consideration applies to financial advisors who refer clients to a third-party valuation service and allow their clients to input sensitive financial information themselves. One main reason for a Financial Advisor to not want to refer a client to a self-valuation service like BizEquity is the client’s data is captured by the provider and that data is sold to competitors. Financial advisors often pay for the service, send clients to the service provider, and their clients’ personal financial information is resold by the business valuation service provider to anyone who wants to purchase it. It doesn’t make sense to give competitors sensitive client information, especially when an advisor is paying for the service.
I recommend that a business owner contact a knowledgeable valuation expert who is an independent third party to get an accurate estimate of value for their business. If a client inputs the financial information themselves it is highly likely to produce an inaccurate value for the business.