Higher The Risk, Lower The Value
By JoAnn Lombardi, PresidentVR Business Brokers/Mergers & Acquisitions
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All businesses face risks, but some companies are riskier than others. Assessing a company’s risk is an important part of estimating its value. Risk and value are inversely related. That is, the higher a company’s risk, the lower its value.
Risk is a function of a company’s external threats and internal weaknesses, but these forces only tell part of the story. On the flip side, a business’s strengths and opportunities minimize risk and, therefore, build value.
When valuators focus exclusively on one side of the story, their conclusions are likely to be skewed. For example, to minimize an estate’s tax burden, an appraiser might unduly emphasize a company’s weaknesses and threats to justify excessive valuation discounts. Conversely, the IRS’s expert might downplay these negative elements and, instead, call attention to the business’s strengths and opportunities.
Framework for Evaluating Risk
Providing a complete, accurate depiction of a company’s future performance requires the valuator to consider both positive and negative aspects of its operations. A strengths, weaknesses, opportunities, and threats (SWOT) analysis provides a four-pronged framework for analyzing risk that links a business’s internal strengths and weaknesses to the opportunities and threats in its external environment. This popular tool helps valuators organize their thoughts and provides a holistic risk assessment.
External forces: Opportunities and Threats
Before jumping headfirst into a company’s financial performance and operations, the valuator assesses the external environment in which a company operates. Opportunities are favorable conditions that — if exploited — may enhance shareholder value. Alternatively, threats are barriers that jeopardize future performance. In many cases, management has little control over these external factors.
Internal forces: Strengths and Weaknesses
After the valuator understands the company’s external forces, he or she is ready to identify its internal strengths and weaknesses relative to its competitors’. Strengths are competitive advantages or core competencies that enhance value. In contrast, weaknesses restrict the company’s performance.
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Tips For Selling Your Business
Business owners own life-long dreams, not businesses. When the time comes to pass on that dream, care should be taken to get the best price. The following tips can help business owners successfully sell their businesses.
- Position the business for sale. This process should begin the day you purchase or start the business. To build long-term value, develop and maintain a tracking system of customer transactions, financial records, licenses, equipment, and inventory.
- Determine the fair market value of the business. Since the market determines value, business intermediaries are the most qualified professionals to value a business. They have the most complete and current information on actual business sales and pricing formulas, and can therefore provide businesses with accurate market values.
- Manage the business. A common mistake made by sellers is to relax once they have decided to sell their business. To maintain maximum value, continue to manage your business with complete dedication and keep up your inventory, maintenance, advertising, and customer service levels.
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The Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act
by Jack Postregna, VP. SBA Lending Officer, Credit Bench by First Home Bank
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As a trusted & preferred lender for VR Business Brokers, we feel it is our duty and obligation to keep our referral partners informed with what is happening in the marketplace. On December 27, 2020, a new relief bill was passed into law intended to provide the much-needed economic support to help businesses in making it through the winter months. The bill, known as the “Consolidated Appropriations Act, 2021”, allocated funding to the Small Business Administration, which covers several relief programs. One of which is the Economic Aid to Hard-Hit Small Businesses, Non-profits and Venues Act. This Act provides $325 Billion for additional assistance to those struggling to recover from the impact of the COVID 19 Pandemic. This critical assistance provides small business owners with the capital they need to survive the pandemic and includes critical resources for the smallest businesses. The SBA program “enhancements”, which we are calling them, include an SBA Loan Guaranty increase from 75% to 90% on all SBA loans. In terms of payment assistance, SBA loans approved after January 31, 2021 to September 30, 2021 will receive 6-months of loan payment assistance from the SBA (capped at $9,000 per month). On SBA Express loans, the amount will increase from $350,000 to $1,000,000 and is extended to September 30, 2021. After this, it reverts to $500,000 on a permanent basis. The SBA Guaranty Fee charged to the borrower is also waived!, huge benefit! There will also be a Second Draw PPP Loans.
You may wonder what the SBA loan program guaranty increase does? Good question, it mitigates the risk of lending in this challenging environment & promotes access to capital to these Borrowers. All SBA 7a Loans approved through September 30, 2021 will receive a 90% guaranty from the SBA. Current guaranty ranges between 85% for loans less than $150,000 and 75% for loans greater than $150,000. The loan guaranty last changed after the economic recession of 2008, it was the 90% guaranty for American Recovery & Reinvestment Act of 2009. SBA Express Loans less than $350,000 approved through September 30, 2021 will receive an increased SBA guaranty from 50% to 75%, the guaranty percentage remains at 50% for SBA Express loans over $350,000.
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Exit Planning - Why Knowing Your Valuation is So Important
By Camm Morton, Owner of VR Business Brokers in Baton Rouge, LA
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Exit Planning is a Journey best started long before the actual exit. In the very first phase of Exit Planning, the focus is on the value of the business and its impact on the business owner’s goals after the exit. In other words, can the owner comfortably retire with the current value of the business and their other investments? Without a pretty good sense of the value of the business, all exit planning decisions are flawed. So, do you know the value of your business or is the value you have in your head just a “hope”.
Exiting your business can be a chaotic nightmare or a smooth transition, depending on when and how you prepare for it. This may be stating the obvious, but there are many told and untold stories of business owners who believed the selling price of their business would be the nest egg they needed to live comfortably in their retirement years only to be saddened by reality. So, what is the strategy to maximize the potential value of your business and how do you plan for the inevitable exit?
Most importantly, as an owner, realize that any dollar earned, which does not remain with the company, impacts your company’s potential value to investors. Buyers of small businesses are generally interested in purchasing a stream of cash-flows, which is evidenced by your tax returns and supported by your financial statements. We all recognize that some expenses of a personal nature can be run through our business and have the positive effect of reducing the amount of taxes we pay. However, your professional adviser can assist in identifying and reconciling the differences between your books and your tax returns to provide the buyer with an accurate picture of the available cash flow generated by your business. This is what the buyer is looking for, cash flow, as a return on their investment.
Cash Flow
What exactly is cash flow? From an owner’s point of view, it is the money left in the bank after paying all of the expenses, often thought of as net income. From an investor’s standpoint, there are a number of adjustments which are made to get from the net income or earnings before interest, taxes, depreciation and amortization, EBITDA, to the annual adjusted cash flow of a business. Adjustments can be thought of as changes made to recognize the true amount of cash that is available annually to the owner as a return on the investment made. These adjustments will include items like interest, depreciation, owner’s salary, and other personal items, such as cars, phones, travel, etc. Additionally, if there are any extraordinary expenses incurred by a company, they will have to be adjusted to reflect their specific impact on available cash flow. Your professional advisor can assist in analyzing the subject company’s financial statements and tax returns to assist the seller or buyer of a business in calculating the true annual cash flow of the business.
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How PE Firms Can Use Content Marketing to Source Deals
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Content marketing is defined as a type of marketing that involves the creation and sharing of online material that does not explicitly promote a brand but is intended to stimulate interest in its products or services. Said another way, content marketing is the misdirection of offering your target audience something of value so that your brand is consequently elevated. You might say that magicians discovered the power of sleight of hand, and marketers followed suit.
There’s some debate about the efficacy of content marketing, particularly within PE. This is probably due to the fact that even a well-executed strategy can take between 6-9 months to germinate thanks to algorithms that reward those that regularly produce reliable information. However, the data suggests that content marketing is indeed an effective way to drive lead volume. For example, companies with blogs get 67% more leads than those that don’t. So, shouldn’t investors also incorporate blogging into their lead generation tool kit, particularly while it remains a differentiated strategy? As the saying goes, “It only takes one deal.”
Thanks to the internet, the menu of content marketing options and distribution channels is robust and has given rise to not only blogs but vlogs, video testimonials, podcasts, infographics, E-books and other forms of media. Just take a spin through your LinkedIn feed, and you’ll get a sampling of the major food groups of content marketing at varying levels of quality2. For a time, content marketing in private equity consisted of basic press release posts which, if plotted on a graph where the Y-axis were “creativity” and the X-axis were “value-add”, this strategy could be found in the deep southwest portion of Quadrant 3 (see chart below). However, some early movers are starting to raise the bar for M&A-related content to the benefit of the primary target audiences which include:
- M&A industry professionals
- Business owners, generally
- Business owners operating within an industry of specific interest to the PE fund
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Outstanding High End Hair Salon & Spa for Sale in Palm Beach, FL
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Internationally well known hair Salon & Spa with a huge loyal customer base has come on the market. High margins and fantastic business opportunity for investor/operator. Highly trained team of hair stylists, estheticians, receptionists, and managers. Provides a wide range of hair and spa services: Hair styling, hair treatments, extensions, nails, hand and foot treatments, body treatments, facials, massages, make-up for weddings and permanent make-up, waxing, eye brow, and lashes. Very talented team so the owner doesn't need to work full time. The property is a free standing building -70 parking spaces and valet service.
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VR in Greenville, SC Facilitates Sale of a Telecommunications Company
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Voice Communications business which performed installation and maintenance of phone systems and of VoIP (Voice over Internet Protocol). It was an excellent add-on acquisition for an existing voice and data vendor. The Business refers an estimated $100,000 of data work to preferred IT vendors. The buyer has brought the business in house therefore increasing revenue and profitability.
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Thinking of selling your business or looking for an established
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Have You Ever Considered Selling Businesses?
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