What is a Letter of Intent? Part 3 of 3: Stories from the Trenches

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trenchIn the second part of this Letter of Intent series, we focused on the structure of an LOI (Letter of Intent).

As we wrap up this series, we’ll discuss some recent stories “from the trenches” which stopped an LOI from occurring or severely damaged a deal in process.

It’s Too Late Now

Despite the fact that an owner was elderly and dealing with illness, he continued to delay selling the business.  With literally weeks left to live, the family finally reached out to move towards a sale.

While this meant we would have to deal with the estate, a more complicated process than dealing with an owner, it was doable…until we found out that no taxes had been paid for nine years.

Even if they wanted to fix this problem, it would mean filing nine years of taxes, which would automatically trigger an audit, which would be even more cost and paperwork, not to mention no buyer would go anywhere near a business or an owner who had managed to evade taxes for so long.

The only probable option left to this family is a sale of the equipment, which wouldn’t even recover 1/20th of what the business could have been worth if they’d done things right in the first place (apart from not waiting until the knock of death to sell).

Killed by Kindness

It’s well known that some kind of employee participation in profit sharing or stock options is a great tool for morale and retention.  But, it should never, ever be something done during or near a sale process.  In a recent case that we dealt with, the seller blindsided everyone in a meeting by letting all parties know that not only had he recently introduced a 25% profit sharing program, but that he had already paid out the profits for that year under this new scheme.

It hadn’t dawned on the seller that he’d just voted himself a massive reduction not just in the value of the business for sale, but in the amount of profit the buyer could gain, now that the buyer was locked into a program that had precedent with the employees.  Surely, the seller’s heart was in the right place, wanting to do right by his employees. But he failed to consult with his own circle of advisors, and even with someone who he’d engaged to help him sell his business, his own broker.

We’ve managed to rescue the sale by making sure there are no new surprises, but this is a kindness that ended up being a great cruelty…and it didn’t have to be that way.

Short-term Thinking

If the business you’re selling is location-based, it’s important to make sure you have favorable lease terms not just for yourself, but contingencies in place for whomever will take over your lease if you ever sell.

The reason is that some landlords have short-term thinking and see a sale as a way to extract concessions and more money from someone (the buyer), who really doesn’t have much of a choice and is already spending a lot of money anyway.  They don’t realize that behavior like this ensures that among the first things the new owner does is start looking for a new place to move to once the renegotiated lease is up.

Don’t want to be blindsided by challenges like these?  

Having a broker is going to help you avoid many problems, but the way to avoid 99% of problems is to tell your broker everything.  He/she can then make sure to guide the deal to a successful conclusion for all.

What is a Letter of Intent? Part 2 of 3: Structure

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LOI listIn the first part of this series, we focused on the purpose of a LOI (Letter of Intent).  In this article, we’re going to outline a basic structure of one.

Long form or Short form?

A LOI can be short or long form, and there are advantages (and disadvantages) to both.  A short-form letter will usually focus on price, a few key terms, the length of escrow, and an exclusivity period.

It will be easy to negotiate precisely because it’s short.  The obvious downside is that it leaves some important issues to be resolved down the road.

On the other end is a long form LOI, which will often contain some “legalese.”  These make sense in complex deals because issues that can be deal breakers are identified ahead of time, before diligence and other time-intensive activities.

The major disadvantage is that in identifying some of these key issues so early on, both parties can get bogged down in deal points before the process has even begun, and so momentum is slowed, or in some cases, stopped entirely.

What an LOI must have:

  1. Price and consideration.  Will the purchase be all cash, or will it be in stock?  Will there be an earnout?  A promissory note?  A hybrid which includes all of the above or something entirely novel?
  2. Structure.  Is this an asset purchase, or purchase of shares?  Will this be a merger?  This is very important for tax purposes.
  3. Timeline.  When is this deal expected to close?
  4. Exclusivity.  This means that buyer has a certain period during which no other potential buyers can be going through this process.  This might also include a stipulation for how/when a seller can terminate exclusivity.
  5. Access.  The buyer is going to want access to employees, books, and records for due diligence purposes.  If the sale is being kept from your staff, you will need to structure a way for the buyer to gain the information he/she needs regarding your employees, as well as an explanation to the buyer of the reason for the secrecy.
  6. Prohibitions.  Anything that the seller may not do between the time the LOI is signed and closing, which could include selling real estate, fixtures, or firing key personnel.
  7. Encumberments.  Are there any third parties to be considered?  This could be leases, copier rentals, or key vendors that are part of the critical path of your business.
  8. Conditions for closing, as well as stipulations for how the acquisition agreement/process can be terminated.
  9. How disputes will be handled and in what jurisdiction.
  10. Deposit, if any.  If this is part of the LOI, it should stipulate that such a deposit be paid into an escrow account, typically a third party.  It simply will make things easier if things don’t conclude in a sale.

This list is not meant to be comprehensive, and some LOIs may exclude some of these or add others. What’s key is for you to see what we stated in our first article in this series.  The LOI is an outline of where the deal is going to go. It’s a roadmap and there’s every reason for the buyer and seller to take their time to agree on what this map looks like so that both parties can reach their desired destinations: sale and liquidity event.  

In the final part of this mini-series, our brokers will share some stories “from the trenches” regarding LOIs in deals they’ve done.

Apex is actively looking for Advisors to join our team. If you or someone you know would like to learn more, contact Doug Hubler at or 913-433-2303.

What is a Letter of Intent? Part 1 of 3: Purpose

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Letter of IntentYou will often hear us state in our blog articles Stephen Covey’s well-known maxim: “Begin with the end in mind.”  This very much applies to a Letter of Intent, and it’s one of the most important parts of a business sale.

It’s so important, in fact, that we’re doing a three-part series on it.  This article is going to focus on the purpose of the Letter of Intent, often referred to as the LOI.

What is it?

A LOI is essentially a “term sheet.”  It details a purchase price and any other terms or conditions that a buyer may stipulate in the purchase of your business.

Now, “Letter of Intent” does sound fancy, but there’s usually limited “legalese” in a LOI, and generally, it’s nonbinding.  This means that both the buyer and the seller retain the ability to walk from any deal should terms for a final closing not be agreed to.

Put another way, the LOI is a blueprint for the sale, so while it’s nonbinding, it’s a serious document.  Whatever appears in a LOI is generally considered to be a “good faith” negotiating point and if, as a seller, you don’t accept everything in the letter, you should definitely have it amended before signing it.

What’s the purpose of the LOI?

The LOI serves a purpose for both the buyer and the seller.  For the buyer, it provides exclusivity during a certain time period.  For the seller, the LOI is a serious and demonstrated interest in a purchase, and there is often a deposit that’s put down to accompany the LOI.  For both parties, it’s a prologue to a hopeful conclusion and gives the basic outline for the mountain of due diligence that awaits both of them.

Is there any reason you wouldn’t sign an LOI?

Simply put?  Yes, for the same reason you wouldn’t sell (remember, begin with the end in mind), namely, price and terms.

If you sign a LOI too early, before the buyer is better informed about your business, you may get a lower price and weaker terms.  They are building in risk into their offer.  Don’t be afraid to push back on a LOI, or counter with more information (like a certified valuation) which de-risks the business for them and indicates why you think the price and terms are too low.

You may also receive an “indication of interest” prior to an LOI with a valuation range.  In fact, if the buyer is aggressive and insistent on an early LOI, take a step back and be cautious.  Is this someone you will want to work with?

In the next part of this mini-series, we will examine the structure of a LOI.

Apex is actively looking for Advisors to join our team. If you or someone you know would like to learn more, contact Doug Hubler at or 913-433-2303

With Delays, Deals Die.

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delayEvery business sale is a minor miracle.  Just as the skydiver gently times his pirouettes and turns in his parachute to land precisely within the giant X of his landing zone, so too do all parties aim at completing what needs to be done from the time an LOI is signed to the date a deal is set to close. Think about all the people involved.

Buyer/Seller

The seller has been given a great deal of paperwork to complete for the buyer’s due diligence.  If he/she has been preparing well to sell a business, this may simply be a matter of looking things up and filling in blanks.  

But, if those systems aren’t in place, there’s going to be a lot to do.  The seller has to form a company and work out contracts with new employees and/or investors.  He has to line up the money, which may involve both the SBA and a bank.  Speaking of which…

Bank

Loan committees don’t meet every day.  They meet every couple weeks – sometimes more frequently, sometimes less, but at those meetings, the banker representing you needs to have a substantial amount of paperwork in order to represent you well.  And who is going to get all that paperwork done?  You, the buyer.

Attorneys

The seller and the buyer will both be working with attorneys in order to make sure deal points are handled in a thoughtful and diplomatic way so as to preserve amity and keep the process moving forward.  These meetings may be contingent on items mentioned above.  Did we mention paperwork?

This is all to say that if everyone is aiming towards a date, and then there’s suddenly a delay, it’s a lot like a sudden stop in traffic when you’re driving a car.  Your muscles tighten up and your senses are on high alert.  In the case of a closing sale delay, the question immediately posed is: Why is there a delay?  If you don’t have a good answer to this question, a deal could go away.  Why?

For the seller, the concern might be, “Hang on, this person wants to buy my business, and he/she can’t get the paperwork done?  Is this deal even real?”

For the buyer, the concern might be, “Whoa, is this person hiding something from me?  Can I trust the documentation I’ve gotten so far?”

Honesty

The best course, as always in this business, is disclosure.  Be upfront about why there is a delay, explain what you are doing to correct it, and then hit the target.  The minor miracle of hitting a business closing date?  That miracle is enclosed in a bubble of trust.  The bubble might be able to take a hit – even two – but, you know what they say about third strikes…

Here at Apex we always ask you to keep your lines of communication open with us.  Whatever is on your mind throughout the process feel free to share.  We want to cross that closing date finish line with you, so you can move on to what’s next!

Tax Planning Tips for 2017

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tax-planningIt’s time to start planning and budgeting for 2017 – and that includes tax strategies. While tax planning is one of the more confounding aspects of the business owner’s job, it also presents opportunities for improving your cash flow and profitability.

We ran across a good article on this topic and thought our readers would appreciate it, too. It covers some predictions for tax changes under the new federal administration, along with tips for maximizing your deductions – both personal and business. We hope you find it enlightening.

The article comes from HSMC Orizon, a CPA, business and technology consulting company. They have a lot of experience and a good handle on tax issues affecting business owners. We’ve networked personally with Chairman Gary Hawkins, CPA, CGMA.

One important tip on this topic: When working with your CPA on year-end wrap-up activities and planning for 2017, be honest. Disclose everything that’s going on in your business – both good and bad. Your CPA can be a strong partner in enhancing the value of your business and keeping your books straight. Both are important for ongoing management and will serve you well when you’re ready to sell.

If you or someone you know is interested in buying or selling a business, please call us at 913-383-2671 or contact one of our Apex Business Advisors today!

Selling Your Business? Why an Exclusive Engagement Agreement Is Essential

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agreementAre you looking to sell your business but hesitating to sign an agreement with a business broker?

Thinking about sharing your business opportunity with multiple brokers?

If so, you may want to hear our perspective about the value of an exclusive engagement agreement.

You want your broker to work hard for you.
If you try to sell your business through multiple brokers, how much effort can you expect?

Why would a broker put great effort and investment into preparing a marketing package and expending resources on your deal when he stands a good chance of losing it to another broker?

You want to protect your confidentiality.
Asking multiple brokers to work on your sale almost guarantees a breach of information about the particulars of your business.

Because there’s no commitment on the part of the seller, the brokers may become more flexible about the information they’re willing to share. The brokers will be talking to the same set of potential buyers, and they may be more interested in satisfying the needs of the buyer rather than the seller.

You’d like to maintain the value of your business.
Having multiple brokers working on your behalf with the same buyers could signify some desperation or lack of motivation. In either case, the buyers will not perceive it positively and will most likely show a reluctance to engage.

If someone saw the same business on the web from three different advisors or received direct calls from them, they would be really curious about the circumstances and would probably approach the opportunity with much more skepticism.

You want a broker with experience.
Ask yourself why a broker may be willing to work without an exclusive agreement. Could it be inexperience, a poor record or desperation for business?

An exclusive engagement agreement protects both the buyer and the seller. It sets expectations and establishes a mutually beneficial relationship. Our agreements typically cover one year because the average time to sell a business is around nine months.

Your broker will invest a lot in helping you sell – from assisting you with positioning/marketing your business and finding potential buyers, to qualifying them, helping you negotiate the deal, and working with bankers, accountants and attorneys to get the deal to closing.

To ensure you’ve chosen the right broker before signing an exclusive agreement:

  • Do your research. Look at the broker’s current listings, past activity and testimonials from happy buyers and sellers. Ask for references from accountants, lawyers and other professionals with whom they’ve worked.
  • Agree on the services your broker will provide and clarify your expectations about regular progress reports – by email, phone or in-person meetings.
  • Be patient. But if you’re not seeing the effort you expect, speak up early! Open and honest communication is always best.

If you haven’t met a single qualified buyer after a few months, you’ll want to regroup. Reassess the pricing, look at feedback from potential buyers and discuss adjustments with your broker. When you’ve established a trusting, clear agreement at the start, these conversations should be comfortable for both you and your broker.

If you or someone you know is interested in buying or selling a business, please call us at 913-383-2671 or contact one of our Apex Business Advisors today!

4 Reasons Why Business Owners Need to Pay Themselves First

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Post by Apex President and Business Broker Doug Hubler, Certified M&A Professional (CM&AP)

As a business owner, you may be tempted to avoid paying yourself a conventional salary. After all, payroll is an extra expense, right? Who needs those employment, Social Security and Medicare taxes? Plus, the bottom line will look a lot better if you don’t take a paycheck, correct?

Not exactly. I’d like to take a few minutes to bust those myths and ask you to consider the advantages of paying yourself a reasonable salary from your business.

1.You lose the opportunity for retirement savings and the associated tax deductions.

If you don’t take a paycheck, you can’t take advantage of tax deferred retirement plans such as deferred comp, 401(k) or SEP accounts. That means you miss out on saving for retirement.

Considering the power of compounding, skipping just a few years of retirement savings can put a big dent in your potential nest egg. Foregoing a paycheck and retirement savings also means you may actually pay more taxes.

money2.Your Social Security payments will suffer.

If you don’t take a salary or take too little, you could be reducing the amount of your Social Security benefit. According to Investopedia, your benefit is based on your highest 35 years of earnings.

If you don’t record income for at least 35 years, the formula inserts $0.0 for the missing years and indexes your benefit accordingly.

3.You could run into problems with the IRS.
Paying yourself too little or not at all can also create problems with the IRS. The IRS expects you to pay yourself a reasonable salary for a person in your position. I’m a small business owner myself, so I understand how hard this decision can be.

I worked with my financial advisor, Joe Pribula at Wells Fargo, to come up with a salary amount that made sense given the needs of my business, my family and my retirement goals.

4.You skew your business valuation.
When you go to sell your business, your paycheck will factor into the company’s valuation. Most buyers will want to see how their personal income needs match with what the sellers’ salaries have been. And taking no salary or commingling your personal expenses with those of the business will confuse that picture significantly.

Buyers and their bankers won’t understand why a seller wasn’t able to pay himself a salary when the business shows a consistent profit. They will see red flags instead. Believe me, you don’t want to be going backwards and trying to correct or adjust your books when it’s time to sell.

If you’re not sure how much to pay yourself, you might want to consult with an accountant or a tax specialist. At the minimum, you’ll want to consider:

  • Funding your own personal needs
  • Maximizing your tax-deductible savings
  • Keeping enough cash in the business to supply working capital for three months or more

If you or someone you know is interested in buying or selling a business, please call us at 913-383-2671 or contact one of our Apex Business Advisors today!

Should You Sell to a Private Equity Group?

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Private equity groups (PEGs) are always looking for good businesses to buy – ones that are ready to grow. They seek businesses that are successful but need an infusion of capital, expertise, scale or marketing to reach their full potential.

Often, PEGs will purchase a large percentage of the business and ask the owner to maintain some ownership and stay involved in running the business. They’ll then seek to grow the business and possibly sell it again.

The Pros: Growth, Two Paydays, Gradual Separation

privateequityThat scenario sets you up for two paydays – one at the initial sale and another after you’ve grown and the private equity group either sells the business again or buys you out at a much higher value!

That’s just one of many benefits when selling to a PEG. It may be right for you if your business is successful but stagnant – if you’re looking for help taking it to the next level.

These buyers are good at what they do; they likely have other businesses like yours. Because they typically don’t want to get into the weeds, they often want you to continue leading for a time, while they add oversight and assistance in the areas where you’re lacking.

The Cons: No Pricing Premium, More Thorough Examination, Potential Cost Cutting
In our experience, private equity investors are tough negotiators. However, they will offer a fair price, rarely paying a premium. They will require more time consuming due diligence – typically 90 days. They are in no hurry; they’ll look at 500 potential deals before choosing one. So they won’t hesitate to put you through your paces.

To fund growth, these groups may require the business to do some cost cutting, layoffs, and other changes, which could make you uncomfortable. This is especially true if they own other businesses like yours and are looking for synergies.

Be Prepared

  • If you think your business may be attractive to a private equity group and you’re interested in selling, do some prep work (check out our post 6 Critical Factors That Make Businesses More (or Less) Attractive to Buyers). Talk with an advisor to understand your strengths and weaknesses.
  • If you attract interest early on, don’t get greedy and assume you’ve set your price too low. You may not get a second group interested.
  • As you begin negotiations, make yourself available, and work on building a relationship with the potential buyers. You’re likely to be working with them for some time, so you’ll benefit by getting off to a good start.

If you or someone you know is interested in buying or selling a business, please call us at 913-383-2671 or contact one of our Apex Business Advisors today!

Nearly Every Offer You Receive Is Worth Considering

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offerPost by Business Broker Jay Lehenbauer, Certified Business Intermediary (CBI), and Apex President and Business Broker Doug Hubler, Certified M&A Professional (CM&AP)

When you’re ready to sell your business, you may feel like you’re putting your very self out to bid. So it’s natural to feel offended if a buyer submits an offer that shows he doesn’t value your business as highly as you do. But we’d like to help you see that nearly every offer you receive is worth considering.

Remember, most buyers are feeling pretty vulnerable, too. Many are putting their life savings on the line to buy your business.

First of all, you need to trust your broker to price your business competitively and only bring you deals that are worth considering. We rarely meet buyers who are trying to take advantage of a seller. If we do, we probably won’t even ask you to consider the offer. Remember, we represent you as the seller, so we always keep your best interest in mind.

As a general rule, we won’t consider an offer that’s less than 75% of the asking price. That’s a simple matter of our credibility and trustworthiness. If we do get a serious offer under that threshold, we might do some research to find out where the potential buyer is coming from. Does she know something about the business that we failed to uncover during our due diligence? That’s rare, but we do try to consider all the possibilities.

Low Offers May Have Merit
So, what happens if you get an offer that’s within 25% of your asking price, but it still feels too low? Here are some ways to consider it:

  1. How long has the business been on the market, and how quickly do you need to get out? If you’ve been on the market for more than a year, you might consider taking a lower offer.
  2. What can you do to lower the price? For example, can you remove some assets – such as older inventory or equipment – and sell them separately?
  3. What elements of the deal can you negotiate? Financing part of the purchase for the buyer may get you a better price, but bank financing and cash at closing may be more appealing.

Walking Away Can Be Dangerous
Several years ago, we were working with a seller whose asking price was $1.8 million. He was offended by a solid offer for $1.2 million and turned it down. Six months later, he shuttered the business. He would have been lucky at that point to get $100,000 for the inventory.

Another client priced his medical services business at $15 million and walked away from multiple early offers in the $11 million to $12 million range. A few years later, he sold for just $4 million.

Compromising May Work
Recently, we were helping a seller who wanted $1.1 million for his business and real estate. After two and a-half years on the market, the best bid he got was $400,000. He desperately needed to pay the bank and settle some other debts, so we all worked together and got creative. The buyer, the seller, the bank and Apex all gave a bit to make the deal work. And the proof is in the pudding. We’re still friends with the buyer and the seller today. The buyer has approached us about additional deals, and the seller has given us two referrals.

Keep the Lines of Communication Open
We often talk about the importance of building trusting relationships among the buyer, the seller and the broker. Some tips for successful negotiation:

  • This is a business transaction; try not to get emotional or take things too personally.
  • Even if you get upset, keep the lines of communication open.
  • Discuss every offer and consider why it was made the way it was.
  • Finally, be sure to have difficult conversations face to face or at least by phone. Email and texting can quickly send you down the path of misinterpretation.

If you or someone you know is interested in buying or selling a business, please call us at 913-383-2671 or contact one of our Apex Business Advisors today!

5 Ways to Ruin the Value of Your Business

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Summer time is vacation time for many of us. But some business owners rarely take time off. Others go on vacation but call it a business trip and expense it to their company. As it turns out, your decisions about vacation can ruin the value of your business, making it very hard to sell for a fair price.

piggy bank1.Exaggerating expenses. Are you using your business as a piggy bank? We often see business owners writing off their family trips as a business expense. That’s one way to fund a trip you can’t afford and get a tax write-off, too.

But this type of practice can get you in trouble, inflating the expenses that show up on your P&L and reducing the net income of the business, making your performance look less than ideal.

When bankers consider your business for a line of credit or a loan, they have to look at the numbers on your tax returns; they can’t consider the back-story you provide. If you’re charging personal costs to the business, your expenses will look higher and your margins will appear lower than those of your competitors. This kind of practice can even force a banker to call an existing loan. We’ve seen it happen.

Excessive personal expenses made one client’s P&L look so bad that we couldn’t advertise his business for the price we needed. Now, he’s trying to go back and amend his books to show the actual expense figures. But his accountant is concerned the changes will inspire an audit. That’s not a good place to be when you’re looking to sell.

2.Not recognizing revenue to delay taxes. Have you ever gotten a chunk of revenue toward the end of the year and been tempted to report it the next year to delay the taxes? That’s another good way to ruin the value of your business.

We had one client who moved a large payment from December to the next January. He definitely dodged some taxes for the current year. But that move threw off his financials, reducing the value of the business by $2 million. To make matters worse, he did this while a buyer was in discussions with him and the buyer had to reduce the amount he was willing to pay!

customer3.Concentrating on only a few customers. Having a large customer or two can give you a great short-term advantage, but it also presents a huge risk for a buyer. You may be allowing one or two customers to overly influence your business decisions.

And the loss of just one customer could ruin your value. As a rule, it’s best not to allow any one customer to represent more than 25% of your revenue.

4.Skipping vacation. Do you find it impossible to take a real vacation from your work? Would the company fall apart if you weren’t there? These are signs your business is overly dependent on you – which means you’ll have a hard time selling it. When your success is too closely tied to one individual, it’s tough for someone else to take over.

If you’re controlling most of the client relationships or your skills are the primary ones driving the business, you need to start delegating responsibility. A business whose owner never goes on vacation isn’t attractive to a potential buyer – not just because of the lifestyle factor but also because of the vulnerability.

5.Having no marketing presence: You don’t have to be a social media maven to manage your basic marketing presence. But you do need a visible, up-to-date website. Potential buyers want to be able to verify your public presence and do a little research on you. If they can’t find your website or your LinkedIn profile, they’ll wonder if you’re hiding something.

All these factors affect your ability to build trust with a potential buyer. One or any combinations of these mistakes can make a buyer question the long term viability of the business and whether the business will provide a reasonable return. Owners need to focus on both the price of the business and the marketability of the business. To get a better price, the business needs to be widely attractive. 

If these value-reducing practices look familiar, now’s the time to begin reversing them. Making some changes will boost the value of your business – and maybe even let you schedule a little R&R!

If you or someone you know is interested in buying or selling a business, please call us at 913-383-2671 or contact one of our Apex Business Advisors today!