Succession planning is something that many business owners fail to think about; however, it turns out there are benefits to succession planning that might not be immediately obvious upon first glance. In this article, we’ll explore a recent Accountancy Daily article, “Succession Planning for Business Owners,” which details the wisdom and benefits of succession planning.
Accountancy Daily polled 500 SME owners and uncovered a variety of interesting facts. At the top of the list is that one-third of owners felt more confident about the future of their businesses when they had a coherent succession strategy.
In what can only be deemed a surprising finding, the poll discovered that 17% of respondents noted that succession planning actually brought them closer to their families. In short, the Accountancy Daily poll found that succession planning came with a variety of unexpected benefits. In other words, it is about more than preparing to hand one’s business over to a new party.
Author Glen Foster makes the point that business owners frequently underestimate the level of effort and time needed to sell a business. The fact is that selling a business is usually a layered process that can even take years to complete. Importantly, business owners must understand that in the time it takes to sell, the market may have changed or their own financial or personal situations may have changed as well. Additionally, selling can be an emotional and stressful process which further complicates the entire matter.
For most business owners, selling a business represents the single greatest financial move of their lives. As such, it is often accompanied with significant stress and anxiety. It is essential not to underestimate the emotional and psychological side of the sales equation. Properly planning years in advance for the sale of a business will help business owners prepare for the emotional and psychological stress that can result from both the sales process and the eventual sale itself.
A key part of the stress of selling a business is that business owners are often left wondering “what comes next?” after selling. Developing a succession strategy is a way to think through such issues well in advance.
Another key aspect of succession planning is to take the steps necessary to make sure that your business is ready to be sold. As Foster points out, you wouldn’t put a home on the market with significant problems, and the same holds true for your business. If you want to receive the optimal price for your business, then your business should be in tip-top shape. This means diving into your books and records and getting everything in order. Working with an accountant or an experienced business broker can be invaluable in this process.
A recent and insightful Forbes article, “Study Shows Why Many Business Owners Can’t Sell When They Want To” penned by Mary Ellen Biery, generates some thought-provoking ideas. The article discusses an Exit Planning Institute (EPI) study that outlined the reality that many business owners can’t control when they are able to sell. Many business owners expect to be able to sell whenever they like. However, the reality, as outlined by the EPI study, revealed that the truth is that for business owners, selling is often easier said than done.
In the article, Christopher Snider, President and CEO of EPI, noted that a large percentage of business owners have no exit planning in place. This fact is made all the more striking by the revelation that most owners have up to 90% of their assets tied up in their businesses. Snider’s view is that most business owners will have to sell within the next 10 to 15 years, and yet, are unprepared to do so. According to the EPI only 20% to 30% of businesses that go on the market will actually sell. Snider believes that at the heart of the problem is there are not enough good businesses available for sell. In short, the problem is one of quality.
As of 2016, Baby Boomer business owners, who were expected to begin selling in record numbers, are waiting to sell. As Snider stated in Biery’s Fortune article, “Baby Boomers don’t really want to leave their businesses, and they’re not going to move the business until they have to, which is probably when they are in their early 70s.”
The EPI survey of 200+ San Diego business owners found that 53% had given little or no attention to their transition plan, 88% had no written transition to transition to the next owner, and a whopping 80% had never even sought professional advice regarding their transition. Further, a mere 58% currently had handled any form of estate planning.
Adding to the concern was the fact that most surveyed business owners don’t know the value of their business. Summed up another way, a large percentage of the business owners who will be selling their businesses are Baby Boomers who plan on holding onto their businesses until they are older. They have not charted out an exit strategy or transition plan and have no tangible idea as to the true worth of their respective businesses.
In Snider’s view, the survey indicates that many business owners are not “maximizing the transferable value of their business,” and additionally that they are not “in a position to transfer successfully so that they can harvest the wealth locked in their business.”
All business owners should be thinking about the day when they will have to sell their business. Now is the time to begin working with a broker to formulate your strategy so as to maximize your business’s value.
No one keeps a business forever. At some point, you’ll either want to sell your business or have to retire. When the time comes to sell, it is important to streamline the process, experience as little stress as possible and also receive top dollar. In Alejandro Cremades’s recent Forbes magazine article, “How to Find a Buyer for Your Business,” Cremades explores the most important steps business owners should take when looking to sell.
Like so many things in life, finding a buyer for your business is about preparation. As Cremades notes, you should think about selling your business on the day you found your company. Creating a business but having no exit strategy is simply not a good idea, and it’s certainly not a safe strategy either. Instead you should “build and plan to be acquired.”
For Cremades, it is vital to decide in the beginning if your preferred exit strategy is to be acquired. If you know from the beginning that you wish to be acquired, then you should build your business accordingly from day one. That means it’s essential to understand your market and know what prospective buyers would be looking for.
According to the Leadership Development Program, Kauffman Fellows, acquirers buy businesses for a range of reasons including:
- Driving their own growth
- Expanding their market
- Accelerating time to market
- Consolidating the market
Some of the more potentially interesting reasons that acquirers buy a business include to reinvent their own business and even to respond to a disruption. At the end of the day, there is no one monolithic reason why a given party decides to buy a business. But there are indeed some general factors that acquirers are known to commonly seek out.
Additionally, Cremades believes that for those serious about finding a buyer, it is critical to make connections. Or as Cremades states, “strategic acquisitions are about who you know, and who knows you. Start making those connections early.” He also points out that buyers are not always who one expects in the beginning of the process. Keeping this fact in mind, it is important to stay open and always look to build solid relationships and keep those relationships up to date regarding your status. Getting your company acquired won’t happen overnight. Instead, it is a process that can take years. Therefore, networking years in advance is a must.
Like many seasoned business professionals, Cremades realizes how important it is to work with a business broker. If you have failed to network properly over the years, then a broker is an amazingly valuable ally. They are about more than offering sage advice, as business brokers can also make potentially invaluable introductions and help you navigate every stage of the acquisition process.
Small business transactions have been enjoying record numbers. But as of the second quarter of 2019, the numbers have begun to take a small dip. Experts feel that the trade war with China is playing a role, according to a recent article, “Q2 Small Business Transactions Down as Trade War Questions Remain.”
The numbers don’t lie, as the number of transactions stood at 2,444 for Q2, which is a drop of 9.6%. But the simple fact remains that businesses are still selling at record levels. As BizBuySell points out, there were 4,948 transactions reported in just the first half of 2019. That means that 2019 could be the second most active business-for-sale market since BizBuySell began tracking data back in 2007. In other words, the Q2 9.6% drop certainly doesn’t mean that the sky is falling.
Deals per broker are declining, and many are looking to the current trade war between the U.S. and China for answers. Increased tariffs and associated worries are, according to many experts, behind the Q2 dip.
A recent BizBuySell poll of business owners noted that 43% are experiencing rising costs as a result of tariffs on Chinese goods. Summed up another way, the trade war with China is impacting small businesses across the board.
Ultimately, consumers will also feel the pinch as well with a whopping 64% of businesses noting that they will raise prices in order to address rising supplier costs. Another attention-grabbing statistic is that 65% of small business owners are considering switching to suppliers not based in China, and 54% are looking for U.S. based supplies. If this trend continues it could mark a dramatic shift.
There is, however, ample good news. According to BizBuySell, buyers looking for a business will discover that the supply of quality listings on the market is increasing. In short, now is a good time to buy a business, as the number of businesses listed as “for sale” grew by a healthy 5.2% in Q2 when compared to the same time last year.
The “business for sale” inventory is growing. According to Bob House, President of BizBuySell, “Businesses are performing better than ever.”
Some of the top performing markets by sales included Baltimore, Portland, Seattle, Austin and Dallas. Those interested in buying a business will find that now is truly a historically good time to do so. Working with a seasoned business broker can help you find a business that is right for you. While the trade war has injected some uncertainty into the overall climate, there is no doubt that now is a historically unique time to buy a business.
Selling a business is more than a big decision, as it is also quite complex. Finding the right buyer for a business is at the heart of the matter. In the recent Forbes article, “Ready to Sell Your Business? Follow These 3 Tips to Find the Best Buyer,” author Serenity Gibbons outlines that selling a business is a multifaceted process with a lot of moving parts.
A central variable for those looking to sell a business is to have a coherent and well thought out exit strategy in place. She points out that at the top of your to-do list should be selling your business the right way, and that means having a great exit strategy in place. In fact, many experts feel that you should have an exit strategy in place even when you first open your business.
Another key variable to keep in mind is that, according to Gibbons, only an estimated 20% to 30% of businesses on the market actually find buyers. This important fact means that business owners, who usually have a large percentage of their wealth tied up in their businesses, are vulnerable if they can’t sell. It is vital for business owners to make their businesses as attractive as possible to buyers for when the time comes to sell.
This article points to author Michael Lefkowitz’s book “Where’s the Exit.” This book outlines what business owners need to do to get their business ready for their exit. Updating your books, ensuring that a good team is in place and ready to go and taking steps to “polish the appeal of your brand” are some of the important topics covered.
Gibbons notes that “not every buyer with cash in hand is the right buyer for your company.” Mentioned are three key variables that must be addressed when looking to find the right buyer: consider your successor, explore your broker options and find a pre-qualified buyer.
In the end, working with a business broker is the fastest and easiest way to check off all three boxes. An experienced professional knows the importance of working exclusively with serious, pre-qualified buyers. Since a good business broker only works with serious buyers, that means business brokers can greatly expedite the process of selling your business.
In her article, Gibbons supports the fact that working with a business broker is a smart move. Those looking to get their business sold and reduce an array of potential headaches along the way, will find that there is no replacement for a good business broker.
The simple but undeniable fact is buying a business is one of the single greatest financial decisions a person can make. Buying a business can lead to great financial success or great financial failure. This fact helps to underscore why it is so important to work with an experienced broker who can help guide you through the often labyrinthian process of buying a business.
In a July 2019 article from Smallbusiness.co.uk, author Kyle Carins explores three key factors that everyone should consider before they buy a business. The first factor covered in Carins’ article, “3 Things to Consider When Buying a Business,” is appeal vs. viability.
Appeal Vs. Viability
Not surprising, the most important variable for most prospective owners is that the business is indeed viable. Not being able to differentiate between an appealing business and one that is viable can lead to financial disaster.
As Carins points out, “Do you want to make money or do you want to fulfill a dream?” Sometimes those two variables can intersect, but not always and not often. In the end, it is vital to know whether a given business is, in fact, potentially lucrative.
However, as Carins points out, it is also important that you choose a business that you will enjoy. Nothing can be more spirit crushing than running a business that you truly hate, even if it is lucrative. Selecting the right business for you is something of a balancing act that must take in a variety of often competing variables.
Considering Hidden Costs
The second factor that Carins looks at is the issue of “hidden costs.” One of the key reasons that it is so important to work with a business broker is that a business broker understands these kinds of factors that you might otherwise overlook. Due diligence is amazingly important. For those who have never bought a business before, working with a business broker offers substantial protection against making a potentially serious mistake.
The third factor examined in Carins article is “Getting a second opinion.” For Carins, getting a second opinion is actually linked to due diligence. He feels that additional opinions regarding a given business should go beyond working with professionals and should also include talking to friends and family who know you well. Additional opinions can help one see angles that might otherwise be missed.
Again, buying a business is complicated and will take up a good deal of one’s time and mental energy. Your friends and relatives, understand your personality and your wants and desires. Their input can be particularly beneficial.
Finding an experienced business broker can help you do more than simply establish whether or not a given business is a “good deal.” Brokers with years of proven experience can also help you determine whether or not a specific business is a good fit for you and your lifestyle.
The 65-year old owner of a multi-location retail operation doing $30 million in annual sales decided to retire. He interviewed a highly recommended intermediary and was impressed. However, he had a nephew who had just received his MBA and who told his uncle that he could handle the sale and save him some money. He would do it for half of what the intermediary said his fee would be – so the uncle decided to use his nephew. Now, his nephew was a nice young man, educated at one of the top business schools, but he had never been involved in a middle market deal. He had read a lot of case studies and was confident that he could “do the deal.”
Inexperience # 1 – The owner and the nephew agreed not to bring the CFO into the picture, nor execute a “stay” agreement. The nephew felt he could handle the financial details. Neither one of them realized that a potential purchaser would expect to meet with the CFO when it came to the finances of the business, and certainly would expect the CFO to be involved in the due diligence process.
Inexperience # 2 – It never occurred to the owner or his nephew that revealing just the name of the company to prospective buyers would send competitors and only mildly interested prospects to the various locations. There was no mention of Confidentiality Agreements. Since the owner was not in a big hurry, there were no time limits set for offers or even term sheets. It would only be a matter of time before the word that the business was on the market would be out.
Inexperience # 3 – The owner wanted to spend some time with each prospective purchaser. Confidentiality didn’t seem to be an issue. There was no screening process, no interview by the nephew.
Inexperience # 4 – The nephew prepared what was supposed to be an Offering Memorandum. He threw some financials together that had not been audited, which included a missing $500,000 that the owner took and forgot to inform his nephew about. This obviously impacted the numbers. There were no projections, no ratios, etc. This lack of information would most likely result in lower offers or bids or just plain lack of buyer interest. In addition, the mention of a pending lawsuit that could influence the sale was hidden in the Memorandum.
Inexperience # 5 – The owner and nephew both decided that their company attorney could handle the details of a sale if it ever got that far. Unfortunately, although competent, the attorney had never been involved in a business sale transaction, especially one in the $15 million range.
Results — The seller was placing almost his entire net worth in the hands of his nephew and an attorney who had no experience in putting transactions together. The owner decided to call most of the shots without any advice from an experienced deal-maker. Any one of these “inexperiences” could not only “blow” a sale, but also create the possibility of a leak. The discovery that the company was for sale could be catastrophic, whether discovered by the competition, an employee, a major customer or a supplier .
The facts in the above story are true!
The moral of the story – Nephews are wonderful, but inexperience is fraught with danger. When considering the sale of a major asset, it is foolhardy not to employ experienced, knowledgeable professionals. A professional intermediary is a necessity, as is an experienced transaction attorney.
If you’ve never bought or sold a business before, then the factors that drive and influence business valuations likely seem a bit murky. In a recent Divestopedia article from Kevin Ramsier entitled, “A Closer Look at What Drives and Influences Business Valuations,” Ramsier takes a closer look at this important topic.
Business brokers and M&A advisors play a key role in helping business owners understand why their business receives the valuation that it does. No doubt, the final assessed value is based on a wide array of variables. But with some effort, clarity is possible.
In his article, Ramsier points out that “value means different things to different buyers” and that the “perceived value depends on the circumstances, interpretation and the role that is played in a transition.” It is important to remember that no two businesses are alike. For that reason, what goes into a given valuation will vary, often greatly.
Looking to EBITDA
Ramier points to several metrics including return on assets, return on equity and return on investment. Another important valuable for companies with positive cash flow is a multiple of EBITDA, which stands for “earnings before interest, taxes, depreciation and amortization.” EBITDA is widely used in determining value. On the flip side of the coin, if the company in question has a negative cash flow, then the liquidation value of the business will play a large role in determining its value.
Primary Drivers to Consider
Ramsier provides a guideline of Primary Drivers of Valuation, Secondary Drivers of Valuation and Other Potential Drivers of Valuation. In total there are 25 different variables listed, which underscores the overall potential complexity of accurately determining valuation.
In the Primary Drivers of Valuation list, Ramsier includes everything from the size of revenue and revenue stability to historical and projected EBITDA as well as potential growth and margin percentages. Other variables, ones that could easily be overlooked, such as the local talent pool and people training are also listed as variables that should be considered.
Support for the Business Owner
The bottom line is that determining valuation is not a one-dimensional affair, but is instead a dynamic and complex process. One of the single best moves any business owner can make is to reach out to an experienced business broker. Since business brokers are experts in determining valuation, owners working with brokers will know what to expect when the time comes to sell.
By Richard Jackim, JD, MBA, CEPA
Managing Partner, Jackim Woods & Co.
The litigation support industry and the court reporter sector, in particular, is a highly fragmented industry dominated by hundreds of small local, state and regional players. While there are several dozen national and international firms, no single firm has more than 5% of the overall market. Over the last ten years, a handful of well-financed litigation support companies have been quietly acquiring local and regional court reporting firms to build their national and international litigation support platforms. The dramatic increase in the number of court reporter acquisitions over the last few years suggests that the consolidation play is still top of mind for many financial and strategic buyers. We have included a summary of the court reporting companies that have sold recently.
We firmly expect the wave of court reporting firm acquisitions to continue and for it to remain a seller’s market for the foreseeable future. There are several reasons for this increase in M&A activity in the court reporting industry.
The first reason is that most owners of court reporting firm are in their late 50’s or older and are beginning to think about retirement. For these owners, selling the company to another entity allows them to take some money off the table, continue to work for a few years, and guarantee jobs and benefits for the trusted employees who work for them for years.
Shortage of Court Reporters
Next, the wave of consolidation is likely to continue due to the increased demand for court reporting and litigation support services combined with a decrease in the number of people entering the court reporting profession. This points to a severe shortage of court reporters for the foreseeable future. To grow, a court reporting agency needs to employ more court reporters and if you can’t recruit them fast enough, the next best option is to acquire an existing court reporting firm and add that firm’s reporters to your roster. This accomplishes two important goals: acquiring trained and productive employees and gaining a loyal local client base at the same time.
Changes in Technology
The third reason the court reporting industry consolidation makes sense is the changing nature of the demand for their services. The continued cost pressures on courts, law firms and their clients are forcing these consumers of court reporting services to change their business practices. More than 45 states now accept digital recordings (both audio and video) in the courtroom. The adoption of new technologies can assist the court reporter in producing an accurate record of proceedings, but this requires a significant investment on the part of the court reporting firms which may not be possible for many smaller firms. It’s important for a company to have invested in and maintained cutting-edge utilization of technology as a competitive advantage. Any company can buy technology. But it takes good management, skills training of employees, and a dedication to optimizing technology (machinery, automation, software, etc.) to turn an investment in hard assets into real value for the company. Technology also provides a way for companies to vertically integrate into complementary capabilities and extend their reach to new customers.
Changes in Client Requirements
In addition, consumers of litigation support services are increasingly looking to reduce the number of vendors they work with and find economies of scale in their operations. Clients are increasingly looking for one firm that can provide them with a comprehensive set of litigation support services including, court reporting services, eDiscovery services, document management and storage solutions, video conferencing, and other litigation support services. This is especially true for the large national and international law firms and insurance companies that are the biggest users of litigation support services.
The fifth reason the consolidation wave will continue is that despite advances in technology, court reporting is at its heart a service that is delivered locally. You need to have a presence in the local market, meet with clients, and provide services locally. When a court reporting company is interested in entering new markets, either in terms of geography or a new industry sector, it is usually safer and faster if it is done through an acquisition. A company that is entrenched in a local market and has a good reputation, a solid and diverse customer base in that market or that region, and has the right size, technology and management, can be attractive to a larger company that wants to become a player in that market.
The last reason the consolidation will continue is that size matters. Size tends to indicate the strength of a company. In most cases when a company has grown to a considerable size —say a firm with 200 court reporters that generates $20 million in revenue—it has done so because of good management, a good reputation in the markets it serves, and an effective use of technology. This doesn’t happen by accident, and as a result, buyers and financial investors are willing to pay a premium for these companies. So, if a regional court reporting firm can acquire 1-2 local competitors a year and pay 3-4 times cash flow for each of them over the course of five years, that regional court reporting firm could be worth 4-5 times cash flow when it comes time to sell.
Below is a summary of 38 sales of court reporting firms over the last few years. This is a partial list that reflects only the publicly announced deals. Since most transactions are private, we estimate there is an equal number of deals that were not reported.
Recent Sales of Court Reporting Firms
David Feldman Worldwide Court Reporting, 2018
Gramann Reporting, 2018
Tayloe Court Reporting, 2018
Amicus Court Reporters, 2017
Ayotte & Shackelford, 2017
Baltimore Court Reporting, 2017
Barrister Reporting Service, 2017
Carpenter Reporting, 2017
Cook & Wiley, Inc., 2017
Deitz Court Reporting, 2017
Dominion Reporting, 2017
Downtown Reporting, 2017
Everman & Everman, 2017
Friedman, Lombardi & Olson, 2017
Hoorwitz Court Reporting, 2017
Litigation Services, 2017
Wheeler & Hallford Court Reporting, 2017
Bienenstock Nationwide Court Reporting, 2016
Brunson Court Reports, 2016
Gregory Court Reporting Service, 2016
Independent Reporting Services, 2016
Lake Shore Reporting, 2016
Love Court Reporting, 2016
MJC Reporting, 2016
Sclafani Williams Court Reporters, 2016
Sperling & Barraco, 2016
Realtime & Court Reporting, Ltd, 2015
Elisa Dreier Reporting, 2015
M.A.R. Reporting Group, 2015
Shelley Plate Reporting, 2015
All Keys Reporting, 2014
Legal Ease Reporting, 2014
Electronic Legal, 2013
Tooker & Antz Reporting, 2013
American Realtime, 2012
Carol Ann Hargreaves Company, 2006
About the Author
Rich Jackim is an experienced investment banker and a former attorney who practice law with White & Case in New York and overseas. He specializes in advising business and professional services firms in mergers and acquisition transactions across the United States. If you own a court reporting or litigation support company and would like to explore your options, please contact him at email@example.com or at 224-153-5142 for a free, no-obligation consultation.Read More
Personal goodwill can have a profound impact on both small and medium-sized businesses. In fact, it can even impact the sales of larger companies. Ultimately, understanding how personal goodwill is cultivated is of great value for any company.
During the process of building a business, a founder builds one or more of the following: a positive personal reputation, a personal relationship with key players such as large customers and suppliers and the founder’s reputation associated with the creation of products, inventions, designs and more.
What Creates Personal Goodwill?
Personal goodwill can be established in many ways, for example, professionals such as doctors, dentists and lawyers can all build personal goodwill with their clients, especially over extended periods of time. One of the most interesting aspects of building personal goodwill is that it is essentially non-transferable, as it is invariably attached to and associated with, a particular key figure, such as the founder of a company. Simply stated, personal goodwill can be a powerful force, but it does have one substantial drawback. This is as the saying goes, “the goodwill goes home at night.”
How Does It Impact Buying or Selling a Business?
Buying a business where personal goodwill has been a cornerstone of a business’s success and growth presents some obvious risks. Likewise, it can be difficult to sell a business where personal goodwill plays a key role in the business, as a buyer must take this important factor into consideration. Certain businesses such as medical, accounting or legal practices, for example, depend heavily on existing clients. If those clients don’t like the new owner, they simply may go elsewhere.
Now, with all of this stated, it is, of course, possible to sell a business built partially or mostly around personal goodwill. Oftentimes, buyers will want some protection in the event that the business faces serious problems if the seller departs.
Solutions that Work for Both Parties
One approach is to require the seller to stay with the business and remain a key public face for a period of time. An effective transition period can be pivotal for businesses built around personal goodwill. A second approach is to have some form of “earn-out.” In this model, at the end of the year lost business is factored in, and a percentage is then subtracted from monies owed to the seller. Another option is that the funds from the down payment are placed in escrow and adjustments are made to those funds. It is important to note that the courts have decided that a business does not own the goodwill, the owner of the business does.
No doubt, businesses in which personal goodwill plays a major role, present their own unique challenge. Working with an experienced professional, such as a business broker, is an exceptional way to proceed in buying or selling this type of business.Read More