At What Age Should I Sell My Company?

That’s a question I hear often. The easy answer… well, there is no easy answer.

A lot can be said about the individual who wants to continue working as they progress in age, but invariably the real question is not about their age as much as it is about their desire to retain equitable value.

I’ve seen business owners who’ve owned and run  their business into their 90’s. I’ve also seen 30+ year-olds tell me that they are “burned out”. So, how do you know if it’s time to go? That depends upon YOU!.

First, lets dispel a myth that says for a business owner to work, they can’t work after they sell their interest. A business owner can work as long as they like, either for the entity they are selling, or if that is not possible, for another entity. Most of these “Type A” individuals have dedicated their lives to their business, and enjoy challenges, being productive, thinking, and working in a team environment to achieve goals. When you sell your company, that is not something that can be easily turned off.

But the key factor, as noted, is not your age. Actually, its a point on the timeline that intersects current corporate value, age  of owner, an owner’s ‘effectiveness’, and a prospective buyer’s perception of risk.

Although no scientific study has determined a magical number, my opinion is that the confluence of those lines becomes much more clear the later in life you work. In fact, I have seen owners take a reasonable tumble in value the longer they wait; in one  instance having someone even pass away right while talking to Calder Associates after they realized they should have sold earlier.

Many times, I use the age of 68 to have owners really think of their “value” factor. It’s true, I’ve seen many 68 year old’s who could win an arm wrestling contest with a 35-year-old. But the issue isn’t just strength, it’s, as I like to think, the ease at which you can push a snowball … up a mountain.

As we get older, and after years in your business, the drive and passion of most business owners is “different” (notice I didn’t say ‘less’) than it was when they first started the company. That is likely true for any business owner at any age after a few years. But there are other factors active.

The most important of those is perception and risk. When an owner sells their interest, the buyer not only buys a going-concern, but they buy the knowledge and usually time of the owner to ensure they receive the value they paid for. As Ben Franklin  said, … “In this world nothing can be said to be certain, except death and taxes”. Because of that forthcoming and likely terminable event, buyer’s understandably know and feel that they are acquiring an asset that is becoming less valuable over each day after closing unless they can understand and transition the company to their new style of leadership. Rome wasn’t built-in a day – neither is a corporate transition.

Accordingly, you will see owners always thinking about that day they will sell all or a part of their equity, and buyers trying to determine when will they start taking on greater risk. For the business owner, it’s an inflection point where the mountain changes its upward angle and rolling that snowball becomes harder. Buyers perceive and believe that.

A company is made up of its people, products, customers, vendors, and processes. It’s also an understanding of how those work together that help define a company’s “secret sauce“. Buyer’s want to understand and know that, and Seller’s usually can’t specifically tell them. It’s second nature.

As age and time creeps up on an owner, the confluence of factors that diminish a company’s growth, effectiveness, and transitional value become ever more prevalent. Owners have asked me why then doesn’t a buyer take out a key-man policy to protect against any downside risk? Although in some cases they do, the cost of that policy could be large and it will be taken out of delivered cash flow in the form of a purchase consideration reduction. More to the point, buyer’s don’t want to get these policies inherently because their goal is to make GREATER CASH FLOW AND PROFITS, not just get a refund on their injected capital. Like you, the only factor they can’t prolong is time.

So, when you start thinking about your future and when you likely would sell your interest (we all do the day after we start or buy our company, admit it!) separate your emotional view from your economic one. Make sure to sell when the value is greatest and the road ahead is not one where you need twice as much effort each succeeding year to push that snowball up the mountain. You  can always work, but its easier to push a snowball up an increasingly steep mountain if you’ve received your money to buy a few $250,000 Snow-Cats!

Want to discuss your situation? Call me at 732-212-2999, or email at info@calderassociates.com.

Valuing Inventory – The Dilemma

When you sell a business, invariably, one of the most often asked questions are about inventory. The issue is that most business owners don’t understand how their inventory is to be ‘valued’ by a buyer.

The truth is that there are many ways to look at inventory value. You can say its worth what you paid for it (option 1), or what it is worth today (option 2), or what it should be to continue to run your business efficiently (option 3). these are three options you should consider.

Option 1 seems simple. You buy 1,000 widgets for $1.00 a piece, so logically, it should be worth $1,000, right? What about freight? What happens if you are a manufacturer, and some of your inventory is now in work-in-process? Does it also include the labor cost? These are not only good questions, but sometimes difficult to answer given the variations in business operations.

Option 2 seems somewhat illogical, but you do need to recognize the possibility that variations to inventory can be occurring. Take, for instance the value of highly commoditized stock, like computer memory. You could buy a 1GB inventory chip for $32/each per lot of 100 on a Thursday, and by Monday it may be worth $31.65/each per lot of 100. Since accounting rules require you to value assets at the lower of cost or market, do you continually revalue the inventory to have accurate financial statements? Likely no, but you can be assured that a buyer is NOT going to pay you for inventory that highly fluctuates for a value worth more than it is on the day of closing.

In option 3, you need to be aware of what is necessary to adequately run your business, and maintain it as a ‘going concern’. Although the rationale and details behind this are beyond the scope of this article, consider that many business owners and purchasing managers buy inventory and raw goods that are NOT in optimal quantities. For example, the business owner who purchases 1,000 widgets because he ‘received a  great price’ may make some sense, but on the day they sell the business, the buyer may only NEED 200 to keep the business running well. How much is the excess 800 units worth in that case?

These questions, and a myriad more exist. The challenge is to prepare your business to ensure that you receive the optimal value for your inventory.

Need to know your options, and how to handle it? Speak to an intermediary at Calder Associates that is well versed in inventory and tax requirements who can review the issues YOUR company faces. Get an idea of what is valuable in the marketplace and your role in achieving the greatest return.

What Your Birth Certificate Says About Your Exit Plan

In our experience, your age has a big effect on your attitude towards your business and how you feel about one day getting out. Here’s what we have found:

Business owners between 25 and 46 years old

Twenty- and thirty-something business owners grew up in an age where job security did not exist. They watched as their parents got downsized or packaged off into early retirement, and that caused a somewhat jaded attitude towards the role of a business in society. Business owners in their 20’s and 30’s generally see their companies as means to an end and most expect to sell in the next five to ten years. Similar to their employed classmates who have a new job every three to five years; business owners in this age group often expect to start a few companies in their lifetime.

Business owners between 47 and 65 years old

Baby Boomers came of age in a time where the social contract between company and employee was sacrosanct. An employee agreed to be loyal to the company, and in return, the company agreed to provide a decent living and a pension for a few golden years.

Many of the business owners we speak with in this generation think of their company as more than a profit center. They see their business as part of a community and, by extension, themselves as a community leader. To many boomers, the idea of selling their company feels like selling out their employees and their community, which is why so many CEO’s in their fifties and sixties are torn. They know they need to sell to fund their retirement, but they agonize over where that will leave their loyal employees.

Business owners who are 65+

Older business owners grew up in a time when hobbies were impractical or discouraged. You went to work while your wife tended to the kids (today, more than half of businesses are started by women, but those were different times), you ate dinner, you watched the news and you went to bed.

With few hobbies and nothing other than work to define them, business owners in their late sixties, seventies and eighties feel lost without their business, which is why so many refuse to sell or experience depression after they do.

Of course, there will always be exceptions to general rules of thumb but we have found that – more than your industry, nationality, marital status or educational background – your birth certificate defines your exit plan.

No matter what your age, building a business that you can sell someday makes good business sense.

Seven Powerful Ratios To Start Tracking Now

Doctors in the developing world measure their progress not by the aggregate number of children who die in childbirth but by the infant mortality rate, a ratio of the number of births to deaths.

Similarly, baseball’s leadoff batters measure their “on-base percentage” – the number of times they get on base as a percentage of the number of times they get the chance to try.

Acquirers also like tracking ratios and the more ratios you can provide a potential buyer, the more comfortable they will get with the idea of buying your business. Better than the blunt measuring stick of an aggregate number, a ratio expresses the relationship between two numbers, which gives them their power.

If you’re planning to sell your company one day, here’s a list of seven ratios to start tracking in your business now:

1. Employees per square foot

By calculating the number of square feet of office space you rent and dividing it by the number of employees you have, you can judge how efficiently you have designed your space. Commercial real estate agents use a general rule of 175–250 square feet of usable office space per employee.

2. Ratio of promoters and detractors

Fred Reichheld and his colleagues at Bain & Company and Satmetrix, developed the Net Promoter Score® methodology, which is based around asking customers a single question that is predictive of both repurchase and referral. Here’s how it works: survey your customers and ask them the question “On a scale of 0 to 10, how likely are you to recommend to a friend or colleague?” Figure out what percentage of the people surveyed give you a 9 or 10 and label that your ratio of “promoters.” Calculate your ratio of detractors by figuring out the percentage of people surveyed who gave you a 0–6 score. Then calculate your Net Promoter Score by subtracting your percentage of detractors from your percentage of promoters.

The average company in the United States has a Net Promoter Score of between 10 and 15 percent. According to Satmetrix’s 2011 study, the U.S. companies with the highest Net Promoter Score are:

USAA Banking 87%
Trader Joe’s 82%
Wegmans 78%
USAA Homeowner’s Insurance 78%
Costco 77%
USAA Auto Insurance 73%
Apple 72%
Publix 72%
Amazon.com 70%
Kohl’s 70%

3. Sales per square foot

By measuring your annual sales per square foot, you can get a sense of how efficiently you are translating your real estate into sales. Most industry associations have a benchmark. For example, annual sales per square foot for a respectable retailer might be $300. With real estate usually ranking just behind payroll as a business’s largest expenses, the more sales you can generate per square foot of real estate, the more profitable you are likely to be.

Specialty food retailer Trader Joe’s ranks among companies with the highest sales per square foot; Business Week estimates it at $1,750 – more than double that of Whole Foods.

4. Revenue per employee

Payroll is the number-one expense of most businesses, which explains why maximizing your revenue per employee can translate quickly to the bottom line. In a 2010 report, Business Insider estimated that Craigslist enjoys one of the highest revenue-per-employee ratios, at $3,300,000 per employee, followed by Google at $1,190,000 per bum in a seat. Amazon was at $1,010,000, Facebook at $920,000, and eBay rounded out the top five at $530,000. More traditional people-dependent companies may struggle to surpass $100,000 per employee.

5. Customers per account manager

How many customers do you ask your account managers to manage? Finding a balance can be tricky. Some bankers are forced to juggle more than 400 accounts and therefore do not know each of their customers, whereas some high-end wealth managers may have just 50 clients to stay in contact with. It’s hard to say what the right ratio is because it is so highly dependent on your industry. Slowly increase your ratio of customers per account manager until you see the first signs of deterioration (slowing sales, drop in customer satisfaction). That’s when you know you have probably pushed it a little too far.

6. Prospects per visitor

What proportion of your website’s visitors “opt in” by giving you permission to e-mail them in the future? Dr. Karl Blanks and Ben Jesson are the cofounders of Conversion Rate Experts, which advises companies like Google, Apple and Sony how to convert more of their website traffic into customers. Dr. Blanks and Mr. Jesson state that there is no such thing as a typical opt-in rate, because so much depends on the source of traffic. They recommend that rather than benchmarking yourself against a competitor, you benchmark against yourself by carrying out tests to beat your site’s current opt-in rate.

Dr. Blanks and Mr. Jesson suggest the easiest way of increasing opt-in rate is to reward visitors for submitting their e-mail addresses by offering them a gift they’d find valuable. Information products – such as online white papers, videos and calculators – make ideal gifts, because their cost per unit can be almost zero. Using this technique and a few others, Conversion Rate Experts achieved a 66 percent increase in the prospects-per-visitor rate for SOS Worldwide, a broker of office space.

7. Prospects to customers

Similar to prospects per visitor, another metric to keep an eye on is the efficiency with which you convert prospects – people who have opted in or expressed an interest in what you sell – into customers.

Conversion Rate Experts’ Dr. Blanks and Mr. Jesson recommend you monitor the rate at which you are converting qualified prospects into customers, and then carry out tests to identify factors that improve that ratio. Conversion Rate Experts more than doubled the revenues of SEOBook.com, the leading community for search marketers, by converting many of SEOBook’s free subscribers into customers. Techniques that were found to be effective included (perhaps counter intuitively) restricting the number of places available; allowing easier comparison between SEOBook and the alternatives; communicating the company’s value proposition more effectively; and simplifying its sign-up process. The trick is to establish your benchmark and tinker until you can improve it.

Acquirers have a healthy appetite for data. The more data you can give them – in the ratio format they’re used to examining – the more attractive your business will be in their eyes

Attention to Details Pays Off

For both a business owner and prospective buyer, the attention to detail can make the transfer of business ownership easier to achieve.

For those that think this is obvious, think again. Most small business owners do one thing better than anything else, and it’s usually growing the focus of their business – either a product or service. Face it, if none of us had to keep records of anything, would we complain? Probably not. And with the pressures to stay ahead, make a profit, and beat the competition will always trump record keeping, right?

Well, many business owners AND buyers are surprised that when trying to determine whether a business is a good potential for acquisition by a buyer, that the details of how a company operates, and the ability of the business owner to tie the story of their success together in a complete package is not a simple task.

First, you can be assured that other people like accountants, financial planners, attorneys, insurance agents, lenders, and others will be involved – from both sides! Second, their desire for obvious and not-so-obvious information will be far more than you can estimate. They ask for this to poke holes in the story and bear out the true value and potential of the company.

As a Seller, understanding WHAT is going to be asked of you is important so you have time to plan. Prudent business owners seek the advice of professionals, like a certified business intermediary who understands all the aspects of what is needed to prepare for a future business sale. Dont wait, because this process should be implemented years in advance!

For a Buyer, the availability of accurate and complete information can make the decision to buy easier, and help justify a closer offer to value. That will help you get loans in order to close on the business, and give you a level of comfort.

Remember, preparing for a sale helps the owner AND the buyer, and likely will help justify a speedier transaction, and a price that is agreeable to both the seller and the buyer!

Selling Your Business? How MUCH is Your Equipment Worth?

You’ve decided to sell your business. OK, how do you price it? That’s a complicated question, but one part you will definitely need to know – How much is your equipment CURRENTLY worth? You shouldn’t trust just anyone to determine the value of machinery and equipment. Determining the value of machinery / Equipment should be done by a qualified and certified Machinery and Equipment professional appraiser. Having the machinery and equipment valued in accordance with USPAP (Uniform Standards of Professional Appraisal Practice) will assist your sale, as the valuation MUST pass muster with the SBA, IRS, Courts, Lenders, CPA’s and Attorneys..

M&E Valuations are a requirement, not only for business sales, but for other situations too. He are a partial list when getting an M&E valuation will help you accomplish your goals.

Buy / Sell Agreements
Business Valuations
Mergers & Acquisitions
Loans / Refinancing
Insurable Value
Trust / Estate Planning
Gift Planning
Divorce Settlement
Partnership Dissolution
Converting C Corp to S Corp
1031 Exchange
Foreclosure
Bankruptcy
Retirement Planning
Mergers & Acquisitions

If you find you need an valuation, call Calder Associates, as we know Machinery and Equipment, have professional and certified appraisers on staff, and are respected and sought out by other professionals in their fields!

Successfully Buying A Business In A Down Economy

You want to get out of the corporate rut, leave the traffic behind, and stop worrying about whether your job is on the line each and every day…. sound familiar?

So, you think to yourself “maybe I should buy a company?”

I would like to give you few pointers to help you make an informed decision if you decide to pursue an acquisition, even in this difficult economy.

Ask yourself the following questions:

1. Do I have the ‘entreprenurial spirit’ to own my own business? To many it looks easy, and it may have the potential for great money, but it’s NOT as easy as it looks. Do you have passion, ambition and the ability to lead others? These are all traits that entrepreneurs share and will help you in your quest to be a successful business owner.

2. Do I have adequate capital resources? We all know you need money to buy a business! However, there are many factors to consider other then purchase price when determining how much money you will need to acquire and then run a business. Make sure you have a clear understanding of what you will need to protect your investment. Please seek the advice of an intermediary or your accountant.

3. Do you know HOW to evaluate a business that is for sale? Most people THINK they do, but they don’t really know how to peel back the onion to make an informed decision about the true value of the business. Again, seek expert counsel on this subject with either a business broker or M&A intermediary. These professionals have an intimate understanding of the valuation process. The thorough evaluation of a business will allow you to make an educated decision.

4. Can I get financing? We live in tough times. Getting proper financing takes into account many factors. Do YOU have what it takes to get past underwriters? Ask your intermediary or financial consultant to evaluate your abilty and capacity to obtain a loan before you go to the banks.

5. Do you have a financial bottom line that you need to earn if you are buying a business? Many people think by buying a business they will become rich immediately after closing. The truth is, you are not. Take inventory about what you need to survive, pay necessary bills, and be aware that you may have to live at a level less than you are accustomed to for a while after you purchase your “dream” business.

Need help answering any of these questions?

Contact the professionals at Calder Associates. We can help you reach your goals!

Getting Loans for Business Acquisitions in 2009

Getting a loan to buy a business is not as easy as it used to be. Are you prepared? Will you be able to buy that company you want?

If you want to prepare, start by making good decisions.

First, look for companies that your past experience has some relevance to.

Second, make sure you have a good credit history, as the banks, lenders, and Seller will check.

Third, buy a company within your means. The cash you have for a downpayment should be at least 15% of the purchase price.

Last, make sure you have good control of your personal financial needs. When you start a business, or buy a business, make sure it will pay you what you need to SURVIVE without having to dip into savings.

It’s only when you look at these factors, and addressed each one will you be able to obtain the loan required to help you on your way to financial success!

Are You Ready?

Are you ready to exit your business? Have you given it any thought? Think you may want to sell or retire within 5 years? It is not an easy task and if you are unprepared, it can not only be difficult, but costly and it may not bring the kind of rewards you anticipated.

You need to consider several factors including: family, your employees, the emotional attachment, the market, taxes, and your wants and needs among other things. You even have to think about what you will do the day after you exit.

You need to overcome the obvious obstacles to selling your business, determine where you want to be post sale, decide how best to get there and execute the plan.

How many family members are in the business and what are their expectations? How will your management team react and what are their needs and expectations?

Are there shareholders in the company and how do you handle them in the course of a sale?

Can you identify the key employees and mangers that would ensure continued success for a new owner? Will they stay or feel betrayed and leave?

Is your management team strong enough to run the company without you? This is critical if an investor or Private Equity Group is going to consider your company for acquisition.

There is a true balancing act in exiting a privately held business and many issues need to be addressed. There is a need for Attorneys, Accountants, Financial Planners and a qualified intermediary or broker who understands all the aspects of business transfers and succession planning. The last professional is one of the most often ignored people, but with the right individual selected, the one who usually leads the team and manages the eventual transaction to a successful conclusion. Your intermediary is the one who has the skill set to maximize the value of a sale for the benefit of the business owners.

Still don’t understand why certified and qualified intermediaries make a world of difference in a business sale? You are not alone. Contact us to learn more about how to make any planned sale a profitable one.

So, what is your equipment and machinery worth?

Do you know the value of all the equipment and machinery that drive your business? All the machines, vehicles, tools, trucks, and equipment that allow you to generate the profits and cash flow you’ve grown accustomed to. You know its not book value, and you are uncomfortable about guessing its true value. You should have your machinery and equipment appraised by an unbiased and certified appraisal professional. You may ask yourself “Why should I pay for an appraisal?” The answer is simple… The fact is, in your business, the machinery and equipment may hold the greatest tangible value and be your biggest asset. If you own stocks, you more than likely check the value of your holdings on a regular basis so that you know what you have and what action you may need to take. Given that machinery and equipment can be a key element of any assets transferred in a sale, used for collateral on a loan, or used to help solidify value in estate planning, knowing the real value of your machinery and equipment is crucial.

Let’s briefly go over a few of the basic reasons why you need an appraisal on machinery and equipment. First, if you want to borrow against your asset, you will need to know and prove the Fair Market Value (FMV). Changing the tax status of a corporation (i.e. from a C Corp to an S Corp) requires a certified appraisal, as does elections to sell via an ESOP. Estate planning requires an appraisal. And finally (but not least), if you don’t properly value your business (including the machinery and equipment), the IRS will determine the value for you, and you will be doing a disservice to yourself and your heirs. When you are selling your business or doing a recapitalization through an SBA lender, your bank will require a valuation, possibly including a certified machinery and equipment appraisal. If your business is publicly traded, you must comply with Sarbanes-Oxley and FASB 141 and 142 that require the assets of the business valued on a periodic basis. When it comes time to exit your business, the proceeds of the sale will have to be allocated for the IRS and it will have tax implications for you!

Statistics prove that businesses that are properly valued prior to a sale sell within 7% of the asking price based on the valuation. Businesses that sell without a valuation sell for 80% or less of the asking price and take much longer to sell. Machinery and equipment appraisals are a KEY COMPONENT of a business valuation and are used by valuation professionals to insure accurate assessed value of all assets transferred.

If you want to give yourself the leg up on getting value for your machinery and equipment, contact us MEappraisals@calderassociates.com. Learn how successful businesses keep ahead of the game by knowing “what’s my equipment and machinery worth?”