IN THIS ISSUE: Letter From the 2020 Chair A Pandemic Recession? How Virtual Data Rooms Enhance Communication Between Deal Participants The Impact of a PPP Loan on Recasting Differences Between Business Ownership and A Job New CBIs in 2020! LETTER FROM THE CHAIR: We Found a Way Barry J. Berkowitz, PhD, CBI, M&AMI Year […]
Main Street News November 2016
Letter From The Chair
SCOTT BUSHKIE, IBBA CHAIR
It was great to see so many of you at the conference in Tempe, AZ. Thank you to all of the staff and volunteers for truly putting on one of the best conferences I have ever been to. I think we can all agree we were impressed with not only the great courses offered, mastermind sessions, workshops, and so many networking opportunities but I had many individuals express how impressed they were with the open sharing of best practices.
I look forward to seeing everyone at the one and only IBBA conference in 2017 in Dallas, TX from May 5-8th. I can guarantee you that this conference will be bigger and better than any conference you have attended in the past – as they say, everything is bigger in Texas! Stay tuned for more details regarding the IBBA 2017 Conference because you won’t want to miss it as it will be one of the best investments you can make in 2017.
It is bittersweet as my year as your Chair comes to an end, as it has truly been an honor to serve as your Chair of the IBBA for 2016 (But now I can get back to doing deals again!). My hope is that I left the IBBA in a better place than when I started! I want to again thank Kylene and the AllyAMC staff as they have really taken the IBBA to the next level with their vision and hard work.
The IBBA is truly an amazing organization, and I can safely say that if it wasn’t for this organization I would not be in this business 18 years later. I am forever grateful for the IBBA and I am thankful that I was able to give back to this organization. I know I am not alone when I say the IBBA has helped me become the business broker that I am today. With that, I challenge all of you to take a bigger role than you did last year with IBBA.
As they say you get more out of something the more you put into it and I have personally found this to be absolutely true with IBBA. Attend the conference, join a committee, enter the IBBA Member Excellence Awards Program, or simply tell others all about the benefits of joining our community. Remember, we want to achieve the goal of 1,000 members by 2018!
We are lucky in the role that business owners put us in and the trust they have in us. We are in a very special position to give our clients the gift of both time and money…. Not too many people can state that in their roles. With IBBA and its education/best practice sharing, you will be able to give that gift to more people in 2017 and beyond.
I apologize that I am rambling, but there are so many great things about IBBA that it is hard to find a place to stop – but I will so you can get back to taking care of your clients. A quick quote that I live by: “There is no passion to be found playing small – in settling for a life that is less than the one you are capable of living.” – Nelson Mandela
For me, “I am just living the dream” another day. Thank you again for putting your confidence in me to serve as your Chair in 2016 – it has been an honor. If I can ever help any of you, feel free to email or call me. You are in great hands with 2017 Chair, Lou Vescio and the rest of the board.
Scott Bushkie, CBI, M&AMI, Fellow of the IBBA
Trumps Probable Impact on Business Brokerage
JEFF SNELL, CBI, M&AMI
At least as I see it…
Whether you voted for or against him (hopefully you voted) odds are that a Trump presidency will have a material impact on your checking account. After everyone from world leaders to actors and actresses denounced him, since the election Russia’s and Syria’s Presidents have called for “renewed relations”. The mouthy actors and actresses haven’t moved to Canada (save one who I think is actually going to Italy) – anyway, the point is now that he’s in office the big talkers aren’t walking the walk – they are getting in line.
Let’s look at the various ways the Trump Presidency might impact our lives as business brokers. First, if all goes well, HR 686 – S 1010 will pass and intermediaries will be permitted to receive commissions on non-publicly held stock transactions without FINRA licensure. No more crossing your fingers that the attorney doesn’t know the law regarding stock sales. There are of course defined limitations and once passed you are encouraged to read and understand what you may and may not be permitted to do in such situations. I suspect IBBA will have a webinar and subsequent conference panel or workshop to further clarify as well. These will be ‘must attend’ events.
Second, now that the election is over and votes are counted (with some exceptions like the Governor’s race in my home state of North Carolina) most business buyers and sellers have a renewed sense of confidence regarding proposed business purchases and sales. They generally believe that the rate of State and Federal regulations will not continue to rise and that in time many regulations may even be abated making it less expensive and less administratively burdensome to conduct business. I believe this will lead to more buyer interest especially in the under $1 million owner benefit range. I also believe this will lead to reduced seller interest thus moving the supply demand curve in favor of sellers. If the future looks brighter to a business owner than it has in the past 8 years why sell now? If my logic holds true, multiples will go up perhaps even to pre-recession levels or higher. Again, I think this will be most pronounced in the main street market.
Third, a Trump administration isn’t likely to support a $15 minimum wage (or any increase in the shortterm). This means employers – especially on main-street are less concerned about wages digging into their bottom lines. Contrary to business owners bottom line is the potential shift towards a consumption tax that would have an adverse impact on small business retailers as consumers pay more sales taxes.
Forth, The “Affordable” Healthcare Act or Obamacare. I was on the cover of the New York Times above the fold on July 30th, 2009 with President Obama. Look it up: https://store.nytimes.com/products/new-york-times-front-page-reprint You’ll need to enter the date. That’s me on the left in the brown suit after he spoke at length about all the benefits of his new healthcare plan. He promised that healthcare costs would go down on average by $2,500 per household. Since then my household would pay 200% more, but we raised our deductible to $10,000 per year to lower our premiums just in time for my wife to be diagnosed with stage 3 cancer. $30,000 later in deductibles she’s fine. Lesson: Deductibles are per YEAR not per diagnoses/treatment. So how does this relate to this article you ask? Good question. One of the most high profile campaign topics was understandably healthcare costs. I believe the Trump administration will act quickly to walk back the complicated, expensive and inefficient system and replace it with something that is at least as good as the country had before while lowering the cost of healthcare for business owners (again – increasing buyer demand while lowering seller supply) and families allowing for more discretionary spending and saving.
Fifth, the perception is that business and personal taxes will go down. This supports the more buyer/less seller transaction interest as every dollar not due in taxes goes 100% to owner benefit.
Lower business and personal taxes also mean that the commissions you earn on that large stock transaction that was completed at a higher multiple due to the supply demand shift with higher owner benefit/EBITDA due to reduced taxes and healthcare costs will be taxed at a lower rate.
Be sure to use some of that money to invest in yourself with continuing education and CBI licensing with IBBA and make that donation (or another) that you’ve been planning on to BIEF (https://www.biefoundation.org/contribute-bief/) that will have gotten the federal law changed to a common sense approach on stock sale commissions for all of our benefit.
Add your thoughts and comments on the IBBA LinkedIn page by clicking here: https://www.linkedin.com/groups/145170/145170-6206536552508645380
In August of 2003 Mr. Snell formed ENLIGN Business Brokers and has since added ENLIGN Advisors specializing in lower middle market transactions and ENLIGN Commercial focused on commercial real estate transactions. He is a Merger & Acquisitions Master Intermediary, a Certified Business Intermediary and an Accredited Business Intermediary. He has been awarded the International Business Brokers Association Fellow of the IBBA award and currently serves on the Board of Directors and as the IBBA Credentialing Chairman. Over the past 27 years he has worked in various capacities in the technology industry, professional services, consulting as well as board level positions with several unrelated firms and associations. He serves on the credentialing and conference committees of the Merger & Acquisition Source and is active in his church and is recognized by the University of Chapel Hill Keenan-Flagler MBA school as a regular speaker, coach, mentor and judge in business plan competitions. He lives in Raleigh, NC with his wife Melissa of seventeen years and four young children.
–ENLIGN Business Brokers is a Professional Services Firm serving the Southeast that is headquartered in Raleigh, NC providing business intermediary services ranging from valuation and sale to exit & succession planning strategies.
How “Add-Backs” Impact Business Valuation
STEVEN A. MIZE
One of the most challenging aspects of valuing a small business is the use of cash flow adjustments, also known as “add-backs”. Larger businesses tend to have CPA reviewed or even audited statements and adjustments maybe limited to officer compensation or bonuses. However, for smaller businesses, it’s no secret that owners try to limit their tax liability by expensing personal or “non-operational” items through the business. The concern for outside parties is typically twofold, (1) will a lender accept this and (2) can it be verified? I will try to touchon both subjects below.
“Add-back acceptance” is a grey area, most likely falling under prudent lender policy. Although there is no right or wrong answer, I would ask the following questions to help determine if the addback is reasonable from a financial point of view:
- Is it verifiable? Add-backs such as unreported income or family wages being paid from cash cannot be verified and therefore should not be considered.
- Was it expensed on the tax return or financial statement being analyzed? There are some expenses on an internal P&L that never made it to the tax return…whether a tax deduction (instead of an expense) or elimination by the CPA, you can only addback something that has been expensed. Typical non-expenses may include health/life insurance and distributions.
- Does the expense have any impact on revenue or efficiency? For example, I would typically not add back “advertising expense” as it would be virtually impossible to know how much revenue was generated from the advertising.
- Is the add-back strategic in nature or directly related to the buyer? Fair market value is typically used as the standard of value. This standard of value is based on a hypothetical buyer/seller scenario; therefore, we must assume a hypothetical buyer. Add-backs that are specific to the buyer or buyer’s company are not typically used. Real estate appraisals don’t have different values for different buyers, why should business valuations?
- Is it truly non-recurring or “one time”? For an internet company, is a redesign of a website a one-time expense? Most likely it is an expense that happens every 3-5 years and should be treated as a capital expenditure. Therefore, if the redesign cost $50,000 and needs to happen every 5 years, I would addback the $50,000 for the year of the redesign, but deduct $10,000 for all years analyzed.
The above are just a few questions we typically ask ourselves or the sellers, buyers, or CPAs involved. However, as mentioned, there is no right or wrong answer and simply falls under the “reasonableness” category and ability to support the add-back. Now that you’ve decided to use an add-back, how can it be verified? The following steps are what we typically use in due diligence:
- Have the seller or CPA give the actual dollar amount (not rounded). Sellers and brokers are known for “guestimating” or rounding numbers. We require the actual amount that was expensed on the tax return or financial statement being analyzed.
- Have the seller or CPA explain why the expense is non-recurring. You notice I didn’t say “personal”…CPAs will typically call it non-recurring or non-operating. We typically ask for a detailed explanation of why this expense will not continue with the sale.
- Have the seller or CPA isolate where the add-back was expensed on the tax return or financial statement being analyzed. For instance, if it’s a one-time repair of the facility’s roof, we want to know it was expensed under line 9 of the tax returns called “repairs and maintenance”.
- Have the seller or CPA provide the general ledger that shows this was expensed under that category and matching the amount under #1 above.
In our experience with the lenders, the above due diligence is usually sufficient when reasonably supporting add-backs. I would suggest starting this process early with the seller and seller’s CPA. Addbacks can be frustrating, but are a very important part of small business valuation. The more information the appraiser has, the better he or she will be informed and the more accurate the appraisal.
Steven A. Mize, is the Managing Partner at GCF Valuation, Inc. and PeerComps, Inc. Steve is an accredited Senior Appraiser with an extensive background in the business valuation. Please feel free to contact him with questions on this article or with any other business valuation questions.
IBBA December Learning Webinars
DEVELOPING YOUR BUSINESS BROKERAGE BACK OFFICE
December 14, 2016
12 pm EST
The December IBBA Learning Webinar, conducted by Ron West of Business Brokerage Press is designed to demonstrate how business brokers can leverage existing technologies to develop and automate their own “Back Office” solution. Technologies to be demonstrated include content syndication for email marketing and social media, online NDA forms, confidential file sharing, CRM, SEO, project management, deal management, drip marketing, and how to create workflow automation. Plus, we’ll give you a sneak peek at the upcoming brand new Business Reference Guide Online which is included in your IBBA membership.
HOW TO MAXIMIZE AN IBBA MEMBER BENEFIT – PEERCOMPS
December 15, 2016
12 pm EST
How To Maximize An IBBA Member Benefit – PeerComps, will be conducted by Lori and Steve Mize of PeerComps will demonstrate where PeerComps comps come from, how they differ from other comps databases, and why PeerComps was created. Webinar attendees will also be taken through a demo comp search and a walk-thru of the business valuation process.
BONUS, attendees will learn how they can sign up for PeerComps free of charge thanks to their IBBA Membership
Certified Business Intermediary (CBI) Announcement
Thank you to the 27 members who took the CBI exam in Tempe-Phoenix at the Fall Conference – stay tuned as results will be sent soon!
The current number of CBI’s is 399 which represents 48% of the membership.
The CBI designation is the premier main street credential worldwide. The knowledge and experienced gained in courses, workshops, panel discussions and the exam set professional business brokers apart from their competition, make you more effective and more successful in completing transactions.
If you have not yet completed your CBI requirements and have questions about the process or requirements click here or contact Jeff Snell, the Credentialing Committee Chairman.
Jeff Snell, M&AMI, CBI, ABI
IBBA Credentialing Committee Chair
ENLIGN Business Brokers
The information provided below is excerpted from the Pratt’s Stats Private Deal Update: 3rd Quarter 2016, which is copyrighted by and available exclusively from Business Valuation Resources, LLC. Brokers who contribute transaction details to Pratt’s Stats on closed business sales receive the complete Private Deal Update plus three months of free access to the database for each deal included in Pratt’s Stats.
The quarterly Pratt’s Stats Private Deal Update (PDU) provides general trend information on valuation multiples and profit margins for transactions in the Pratt’s Stats database, available exclusively through Business Valuation Resources, LLC (BVR) at www.BVMarketData.com.
Financial advisors, merger and acquisition professionals, business appraisers, business brokers, investment bankers and many others use the Pratt’s Stats database to determine the value of their subject company by applying the market approach with comparable company data.
Pratt’s Stats is the premier source for private business purchase details and includes both private and public buyers with over 140 data points that highlight the financial and transactional details of the business sales. As of the publication date, the Pratt’s Stats database contains 18,025 transactions in which the buyer was a private party. The database includes over 25,137 transactions in which a privately held company was sold to either a private or public buyer.
The charts and graphs presented below display median values.
MVIC: Total consideration paid to the seller and includes any cash, notes, and/or securities that were used as a form of payment plus any interest-bearing liabilities assumed by the buyer. The MVIC price includes the noncompete value and the assumption of interest-bearing liabilities and excludes: (1) the real estate value; (2) any earn-outs (because they have not yet been earned, and they may not be earned); and (3) the employment/consulting agreement values.
International Business Brokers Association
Members who submit completed transaction information receive a three-month complimentary subscription to Pratt’s Stats, for each included deal, as well as a complimentary subscription to Pratt’s Stats Private Deal Update, a quarterly publication analyzing private-company acquisitions from the Pratt’s Stats database. Pratt’s Stats collects private business transactions of Main Street businesses from business brokers, as well as from middle-market M&A advisors where a public company purchases a private company. The Pratt’s Stats database is updated monthly with an average of 100 transactions. Pratt’s Stats users enjoy:
- Easy searching that identifies comparable transactions by keyword, revenue range, industry name, SIC code, profitability margins, company name, and more
- Hard-to-find data on how deals are structured including payment terms, purchase price allocations, employment agreements, noncompete agreements, private-company financial statements, private company financial ratios
- Valuation multiples that point to the greatest value drivers
- The ability to track market pricing trends via Pratt’s Stats timely deal updates
- Access to payment term information including contingency payment and transaction fee details
- Asking price vs. selling price comparisons for spread analysis
- Listing date and selling date inclusions for timeon-market analysis
Why IBBA Membership Is Important
MICHAEL FEKKES, CBI, CEPA
Those who attended the recent IBBA conference in Tempe, Arizona can attest to the value provided by our association. From the humor filled motivational speech by Marty Clarke that kicked off the conference to the mastermind sessions, workshops, networking events, and instructional classes, the event was extremely informative, not to mention, quite fun. I find the attendees at these events to be the best of the best as they recognize these IBBA conferences are an excellent tool to invest in themselves and enhance their M&A business. I am always grateful to the seasoned members who conduct these workshops, classes, & mastermind sessions, selflessly sharing their secrets to success and market-tested, best practices. I cannot recall any other association that I have been a member of, where the industry veterans were so helpful and genuinely caring about assisting newer members and less experienced brokers with their tradecraft. Personally, no matter how many conferences I attend, I always walk away from these events with at least two to three significant items that I can implement in my business brokerage practice to become a more skilled advisor and better positioned to grow my book of business and make more money. Those who have been around the IBBA for some time, already recognize this, so, if you have not attended a conference recently, be sure to put the May 5, 2017 conference in Dallas, Texas on your calendar.
Of course, the IBBA is far greater and provides significant value over and above the conferences. Many brokers reside in states like me (Tennessee) that has zero licensure requirements; a business-for-sale marketplace that I often refer to as the wild-wild-west. I have found my membership in the IBBA to be a key differentiator that distinguishes me from the countless brokers who are not members nor have any credentials. Maintaining the CBI designation informs my clients that I am well versed in all matters related to the acquisition and sale of a privately held business. I have made a significant effort and investment to become well educated on the M&A process. I have passed a rigorous exam and maintain this credential through a continuing education process from the highest regarded business brokerage association in the entire world. Additionally, my clients value the set of ‘Business Brokerage Standards’ and ‘Code of Ethics’ that our association abides by. Lastly, members of the IBBA have a deep bench of professionals who are able and willing to assist fellow members on any transactional related questions or issues. For those of us who are members, I would like to provide a reminder that when engaging buyers and sellers we should be taking several moments to educate these individuals and prospective clients as to what the IBBA is and why being a member, hopefully with the CBI credential, provides significant value.
Michael Fekkes is a Senior Broker at ENLIGN Business Brokers in Nashville, TN. Michael is a Certified Business Intermediary [CBI], a Certified Exit Planning Advisor [CEPA], Chairman of the International Business Brokers Association [IBBA] – Communications Committee, as well as a former business owner. He can be reached at 910.691.2202 or [email protected]. –ENLIGN Business Brokers is a Professional Services Firm serving the Southeast that is headquartered in Raleigh, NC providing business intermediary services ranging from valuation and sale to exit & succession planning strategies.
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Welcome to our new Members of the IBBA family!
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Cheung Chun Kwok
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National Report: Advisors Divided on When Business Sales Will Return to “Normal” – NOW or 2021 or 2022 November 9, 2020 – LOS ANGELES – The latest data from the Market Pulse survey of business brokers and M&A advisors suggests that pandemic-resistant businesses are in demand. Responding advisors report they completed 301 transactions in the […]
Independence, OH – October 2, 2020 – The International Business Brokers Association (IBBA), the world’s largest not for profit association for the business brokerage industry, is pleased to announce the formation of its first domestic Chapter, IBBA Mid-America, with a primary service region of Missouri, Arkansas, Kansas, Kentucky, Oklahoma and Iowa. Going forward, IBBA members […]