Is Private Equity for Me?
You may have watched reality TV shows like ABC’s ‘Shark Tank’ and thought, “If only I could pitch to those guys.” Reality TV doesn’t always reflect the real world—it rarely does—but there are still lessons from Shark Tank that can be valuable to you as an entrepreneur or even an investor.
Private equity investors buy shares in a private company intending to help grow and, eventually, sell the business. Limited partners provide the funds, and general managers select and manage the investments. Private equity groups usually take a controlling or significant interest in companies in one of three ways:
1. Venture capital: Here, investors focus on early-stage companies expected to produce strong revenue in a few years, or later-stage companies that are likely to generate increased profit in a year or two.
2. Buyout and acquisition financing: Private equity investors use a new business plan and, sometimes, new management to improve a company’s financial performance.
3. Expansion or merchant banking capital: With this approach, investors focus on established companies expanding their operations or entering new markets.
Plenty of myths surround private equity investors. For example, some business owners fear that, if they partner with a private equity group, it might make off with the value of their company by buying low and cutting them out of the rewards when it later sells the company at a premium. This kind of concern generally is unfounded. Private equity can be an excellent way to obtain the funds and expertise you need to grow your company. Before taking the leap, however, you should know the facts about these types of investors.
Shared Control
A partnering company can use the private equity group’s cash infusion to launch new products, make acquisitions or pursue other growth opportunities. Selling to a private equity investor doesn’t mean losing control of your company.
Owners generally retain a substantial interest in the business and, thus, also benefit as the company grows and is eventually sold. In fact, selling less than half of your company allows you to retain full control. Even if you keep only a minority interest, you may be able to work out an agreement with the investor that keeps operating and strategic decisions in your hands.
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Fraud Tactics & Trends: Most Common Business Scams
By JoAnn Lombardi, PresidentVR Business Brokers/Mergers & Acquisitions
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The recent ransomware attacks have prompted many businesses to re-evaluate how they protect their cyber assets.
Some 71% of cyberattacks occur at businesses with under 100 employees. Cybercriminals know that small businesses tend to be easy targets and that accessing a small business’s computer networks often gives them entrée to client and vendor networks, too.
Did you know that more than 90% of ransomware and targeted business attacks start with a spoofed email (aka phishing)?
Scam artists have become more adept at exploiting the weaknesses of small businesses. While some of these business scams are golden oldies, they’re still putting money into the scammer’s pocket – effectively taking it out of the pockets of many small business owners. The best defense against these is awareness and vigilance.
Here are Five of the Most Common Small Business Scams and How to Avoid Them:
1. Advance Fee Loan Scams
Whether it’s offered in an ad on the internet or by e-mail, this scam offers money at reasonable rates – if you send them money. They may say they need the money for insurance purposes or to get the money across the border. Whatever the reason, you’ll never see that money again – or the money they were supposedly going to loan your business.
How to Avoid This Scam: Be aware that it is illegal in both Canada and the U.S. to ask for money upfront for a loan. If you’re asked to pay anything before you’ve received an agreed-on loan, walk away.
Related Scam: Bogus Equipment Leasing Deals – Your business receives a letter saying that you’re pre-approved for leasing. All you have to do is send in your first (or your first and last months’) payment. The scam is that you never receive the equipment that you were expecting to lease.
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Optimizing Profits: A P+CFO Case Study
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In our last article we introduced Profit & Cash Flow Optimization (“P+CFO”). P+CFO is a proactive approach into understanding current profit and cash flow levels as well as optimizing them to achieve peak business performance and enterprise value.
When conducting a P+CFO study, we perform an array of analysis on a business’ historical performance, to have a better understanding of their books as we project an optimal future. A key exercise to calculate a business’ optimal profit level is called an Optimal Profitability Projection (“OPP”).
We use the businesses most recent three years’ income statements and re-cast them to show the true economic value stemming from business operations. To do this, we need to distinguish the difference between income and expenses that are essential versus non-essential, recurring versus non-recurring to business operations. Income and expenses that are non-essential to business operations need to be addressed. For example, eliminating any related party transactions and adding back/taking out any income or expenses that are non-essential to business operations so we can normalize operating results. More specifically, we add back expenses related to the executives, such as officers’ compensation and benefits, deferred compensation, retirement plans, life insurance, etc. Items in the Other Income/Expense section of the Income Statement that are non-essential to business operations can be subtracted or added as appropriate.
Below is an example of an OPP case study:
In this case study, we projected the optimal profitability by using the most recent total sales available from the 2020 Income Statement and the Company’s optimized Direct Costs and SG&A Expenses. Rather than benchmarking the case study to industry averages or competitors, we are benchmarking the Company against itself. The OPP results in an achievable target or goal based upon historical performance. The outcome is a potential increase of $469,586 in earnings before tax, by increasing 2020’s profits from $171,000 to $640,586.
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Add Backs, SDE, and Business Valuation
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One of the first steps in valuing a privately held business is determining the true profitability of the business. Unlike valuing a publicly-traded company based on a simple metric such as a price/earnings ratio (the PE ratio), valuing a privately held business requires a deeper analysis of the business’ profit and loss (P&L) statements.
The P&L statements, typically for the past three years of operating history of the business, are examined to identify both non-recurring expenses and other expenses which may have been taken to reduce the business’ taxable income but are a form of in-kind income to the business owner. This valuation process starts with EBITDA (earnings before interest expense, taxes, depreciation, and amortization), and then adjusts this figure for expenses that are a form of in-kind income to the business owner.
These adjustments are referred to as “add-backs.” The first add back is typically the owner’s salary. This expense reduces the business’ taxable income but is clearly a form of income to the business owner. Other add-backs would include expenses from personal use of company vehicles, expenses from personal use of company technology such as computers and cell phones – the list of add-backs can be extensive. Any expense that reduces the business’ taxable income that is a form of in-kind income to the business owner is typically a legitimate add back.
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Health Food Store for Sale in The Villages, Central FL
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This Health Food retail store which specializes in Nutraceutical, Vitamins & Supplements has been serving one of the nation's fastest-growing communities for over 20 years. It is ideally located in a dynamic shopping plaza anchored by a high-end grocery store and within walking distance of the Villages' busiest town center. It is well known in the World's largest over-50 community for its unparalleled level of customer service.
The Villages is America's fastest-growing hometown and is expected to remain the country's top-selling master-planned community for at least the next decade. All employees and processes are in place for a smooth transition. Not a franchise. SBA pre-qualified with $45,000 down. Should be a perfect fit for an E2 visa.
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VR Located in Greenville, SC Sold Pool Care Service for $500,000.
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Swimming pool maintenance, supplies, and retail business in Upstate South Carolina region. The business generated revenue of $1.1 Mil. and the Seller's Discretionary Earnings were $117k for the year 2019. YTD 2020 Revenue was up ~20% as customers were investing more in their home's outside amenities due to being home more to enjoy them during the pandemic.
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Thinking of selling your business or looking for an established
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VR is The Only Remaining Founding Firm of The International Business Brokers Association ("IBBA").
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Have You Ever Considered Selling Businesses?
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