LeMans, Inc

Welcome to 2012!  One thing is for certain we will meet the challenges that present themselves to us today and tomorrow.  Change is a certainty.  I am amazed when I step into an office that still uses a fax machine.  Change is inevitable and as business owners we must think about making dramatic changes to keep our competitive edge.  2012 and beyond is doing more with less.   Keenly reviewing expenditures and making sure we are getting the maximum return for every dollar spent, whether it is a capital or labor expense.

Businesses that have created greater overhead require higher revenues to meet their needs due to higher cost but also due to lower margins.  Competition is stiff not only from domestic competitors but also due to competitors from around the world.  Whether you are in manufacturing, agriculture, construction or any other industry you will be required to stay highly competitive with every aspect of your business.  It’s a great time to be in business because those who survive will be stronger and better prepared for the technical and competitive changes ahead.  Now is the time to greet the future and thrive!

BizBuySell.com, the Internet’s largest marketplace for buying or selling a small business, released its Third Quarter 2011 Insight Report on business succession trends.  The report shows slight improvement in business succession activity, as closed transactions increased 3.5 percent from 1,586 in Q3 2010 to 1,642 in Q3 of 2011.  This number is down slightly from the 8% year-over-year increase reported in Q2 of 2011.  Here’s their stats. – Dan

“We’re glad to see the year-over-year upward trend that we’ve been reporting in the business-for-sale market continue into Q3,” said Mike Handelsman, Group General Manager, BizBuySell.com and BizQuest.com. “However, there’s no denying that Q3 was somewhat turbulent for the overall economy, so it’s not a surprise that we are down slightly versus last quarter.”

Sold Businesses Reporting Lower Valuations

While closed transactions showed a slight increase over Q3 of 2010, the average multiple of annual revenue that a small business sold for on BizBuySell.com was 0.60, a decrease of 10.9% versus the same quarter a year ago. The average multiple of annual cash flow that a business sold for was 2.42, a decrease of 4.7% vs. the same quarter a year ago. According to Handelsman, this decrease in valuation multiples is likely a result of sellers becoming more realistic .

“The trend toward more realistic expectations regarding valuations is a primary driver of the increase in closed transactions,” said Handelsman. “Business owners who may have been holding out for an economic recovery or waiting for their business to recover are now opting instead to exit their businesses, even if that means accepting a lower sale price.”

Larger Businesses Selling in Q3 than Previous Quarters

Notably, BizBuySell.com is seeing an increase in the average size of sold businesses, with the median sale price for Q3 reported at $150,000, up 7.1% vs. a year ago. Handelsman notes that this increase in sale price is likely the result of a combination of two factors – changes in both financing and valuations.

“As valuations decline, buyers are able to purchase larger businesses than in previous quarters for the same purchase price,” Handelsman explains. “Also, as the lending environment improves and financing slowly becomes more available for business buyers, they are able to buy slightly larger businesses.”

BizBuySell expects the current slight but steady upward trend to continue through the remainder of 2011 and into 2012 as the lending environment continues to improve.

“We’re seeing more attention being paid to business funding though both government programs and legislation, which will help to drive more closed small business transactions,” Handelsman said.

About the BizBuySell.com Insight Report

BizBuySell.com is the Internet’s largest marketplace for buying or selling a small business. The company releases its BizBuySell.com Insight Report on a quarterly basis, reporting changes in closed transaction rates, valuation multiples and other economic indicators for the small business transaction market. Closed transactions are reported to BizBuySell.com by business brokers nationwide.

Successful business management is often more art than science. Being able to blend technical analysis and skills with intuitive decision-making is often a talent that takes years to master. Implement the following 6 essential managerial skills and rapidly improve your overall performance as a business leader.

1. Be a great communicator.

Clear and concise communication is one of the most important managerial skills required. As a manager you must be able to motivate, delegate, negotiate, persuade, analyze, and critique deals, tasks, and team members on a daily basis. Effective communication whether written, verbal, or through digital media are skills required of any manager today. The more you are able to articulate with well written documents, motivating discussions, and powerful digital media presentations, the more likely you and your organization will succeed.

2. Be energetic and enthusiastic.

Negative attitudes bring the entire team down. As a manager with enthusiasm and an optimistic outlook you will elevate those around you and energize your entire team. Adopting a can-do attitude and implementing enthusiasm in your day-to-day interactions will encourage others to look for the positive in even the most challenging situations presented.

3. Exhibit competence in your area of expertise.

As a successful manager you must master your area of expertise. There is no better way to exhibit competence and mastery in your field than to challenge, inspire, and enable your team to successfully complete key goals and initiatives ahead of schedule, under budget, and with exceptional results. Model successful behavior and learn from other successful managers in your field. You don’t have to necessarily blaze your own trail to success, instead build off the successes of others who have already mastered the skills most critical to your position. Research and implement those strategies consistently in your day-to-day management strategies and you are well on your way to becoming a master in your area of expertise.

4. Delegate effectively and efficiently.

Delegation is an often abused function of even the most seasoned veteran manager. Being able to push critical tasks on to other team members isn’t the answer to successful delegation. Instead, delegating to those most suited to the task, providing timely information and guidance, as well as consistently following up to ensure everyone understands the task at hand and the desired results are key to effective and efficient delegation.

5. Remain calm, cool, and collected regardless of the circumstances.

Let’s face it, obstacles arise, unforeseen events transpire, and Murphy’s Law tends rule in spite of the most well thought out plans and objectives. When challenges arise handle them calmly and with authority. Identify the solutions to the challenge and clearly define the ways to successfully navigate the obstacle course presenting itself. By remaining collected and calm regardless of the situation the solution will present itself much quicker and easier than the alternative. Reinforce your teams ability to thrive in any circumstance by remaining composed and confident even if you aren’t entirely certain of exactly what needs to happen when. By remaining clear-headed the solutions will begin to materialize and many of the perceived challenges will work themselves out without requiring any major intervention or corrections.

6. Be your team’s biggest cheerleader and coach.

Encourage your team throughout all stages of the game and offer coaching and guidance as needed during the process. A team is only as good as its leader and requires you to understand what is necessary to motivate the individuals to play at their best. In addition continually recognize the successes of your team and encourage individuals to strive to improve on a continual basis. By leading and encouraging you will motivate individuals to continually find ways to improve their own performance and the team’s in the process.

By incorporating these 6 guiding principles into your current management techniques you will be sure to actively engage those around you and improve results consistently. Though not always easily mastered these techniques are simple and proven. Implement them today and see how powerful each of them can be in your business management objectives.

The Making Work Pay tax credit put some extra cash into most workers’ paychecks in 2010. A single taxpayer was eligible for up to $400 last year, while married couples brought home a maximum of $800.

The IRS wants this form if you file a long Form 1040 or the slightly shorter Form 1040A. Taxpayers who can file the shortest return, 1040EZ, will simply use a work sheet on the back of that form.The money was added to paychecks via reduced payroll withholding. But that isn’t the end, of the credit. Now that filing season has arrived, you have to account for that money by filing Schedule M.

Why the Extra Work?

Although most eligible workers effectively got the credit amount because Uncle Sam took less money from their paychecks, that’s not the official credit claim. Calculations made on Schedule M will help taxpayers determine whether they received the full credit in their paychecks or are due more money from the credit.

Once you complete Schedule M, you’ll transfer the dollar figure you come up with on line 11 of that document to either line 63 of Form 1040 or line 40 of Form 1040A. Form 1040EZ filers will take their work sheet calculation and enter it on the EZ’s line 8.

All these lines on the various tax returns are in the section that records all your tax payments. This includes withholding amounts from your W-2s, certain 1099s and any estimated tax payments you made.

Essentially, at filing time the credit is treated as additional withholding that can increase your refund or reduce any tax you might owe.

Not for All Filers

Because the Making Work Pay credit was in effect for all of 2010, there shouldn’t be as much filing confusion as there was at this time last year. Also, retirees didn’t receive a special payment last year, so they don’t have to file the form this year.

But there still could be some issues with claiming the credit, especially for higher income earners.

The Making Work Pay amount is reduced for joint filers whose modified adjusted gross income, or MAGI, is between $150,000 and $190,000. Single taxpayers whose MAGI is more than $75,000, but less than $95,000, also won’t get the full credit amount. If your adjusted income is greater than the maximum for your filing status, then you won’t get any of the credit.

In addition, some workers aren’t eligible for the credit. The Making Work Pay tax credit is not available to nonresident alien workers or to individuals who can be claimed as a dependent on someone else’s tax return.

Schedule M will help taxpayers sort out those issues.

While extra tax paperwork is never fun, when it comes to the Making Work Pay tax credit, Schedule M could really pay off. The credit is refundable, meaning that taxpayers who qualify for it can get it even if they owe no tax.

We are on a quest to determine how to value a business.  Identifying a potential business buyer’s needs may seem inappropriate with the topics of cash flow, identifying the financial data of a business and establishing a value for the business.  When interviewing a business owner seeking an exit strategy or the sale of their business, often I will hear the comment, “Look I don’t care what a buyer needs.  I’m only concerned about how much I can get for my business.”  To which I will firmly respond, “when selling your business it is tempting to think only about your needs and not that of any interested party inquiring about the sale of you business.”  However, that is incorrect thinking if you want to be successful in selling your business.  There are two parties to every transaction and whether you are selling to a son, daughter or someone you do not know, it is important to identify what their needs are to be successful with exiting the business you are attempting to sell.

The Business Buyer’s Needs are an important component of a business valuation.  There are three basic needs of a qualified buyer seeking to buy a business (this is true even in M&A transactions as well).

The Three Basic Needs of a Prospective Business Buyer

1.  The ability to Retire Debt – When you buy a business you will incur debt in order to acquire the business.  It may be an SBA loan where 20% to 25% is put down by the buyer the balance is financed over a ten year term at a fixed or variable rate of interest.  The other option is owner financing with 30% or more down and the balance held in a private note by the seller with terms negotiated and agreed upon by the seller and buyer.

NOTE:  It is important to know that the statistical data over the years has shown when buying a business the national average of down payment from a buyer to a seller is approximately 55% down with owner financing.  In addition, it is possible (if the business and the buyer can qualify) for a buyer to leverage into purchasing a business with an SBA loan with as little as 10% down.

2.  The buyer seeks a Return on Investment (ROI) – A buyer must expect to put cash into a deal when buying a business.  While it is possible to find a transaction with no money down, they are few and far between.  (I have been brokering businesses since 1994 and have never seen that type of transaction, after all advisors to the deal have to be paid so some money has to change hands at some point and if it involves stock it may not be money but something of value is exchanged.)  In any event, when a business buyer puts money into a deal they expect to receive a ROI which needs to be commensurate with the amount of risk they are willing to take.  Investing in a business is one of many options a person can do with money they are looking to invest.  Cash monies can be invested in the stock market, CDs, money market accounts, real estate etc. (a buyer does not have to buy a business).  We consider a Return on Investment for a business buyer to be 10%, but in reality the ROI can be calculated according to a buyer’s willingness for more or less risk in their investment.  Econ 101 still rings true, “The greater the risk, the greater the rewards” or lack thereof.  Business ownership is not for a risk averse person.

3.  A buyer expects to make A Living Wage or Profit – No one buys a business without the expectation of creating an income eventually for themselves off the business.  This income can come to them in the form of W-2 wages and or in Profits generated off the business.

So there you have it.  A Business Buyer’s Needs are:  Retire Debt, Return on Investment (ROI) and to make a Living Wage or Profit from the business.  Obviously, the larger the business and the greater the EBITDA/Cash Flow numbers are the more creative you can become in establishing the value of small and large enterprises.

Business Values…….To be continued……. Dan

In a recent buyer telephone interview I was asked a very important question by the prospective buyer.  Do business brokers represent buyers?  After all, in real estate transactions you can have an agency on the selling side and one on the buyer’s side of a transaction in a co-brokering arrangement.  Whereby, the commission is then split between the two agencies representing their clients in the transaction and no additional costs are incurred by the buyer’s side.  It is important for the broker to advise the buyer to whom lies their allegiance and what representation does the buyer have available to them.

LeMans, Inc. will co-broker a deal.  The problem lies with the fact that buying a business is unlike buying real estate.  It is executed confidentially (no one knows about the specific business without signing a confidentiality agreement), and fewer practitioners practicing in a very fragmented industry (approximately 40% of agencies or more are sole practitioners).  In addition if a buyer has an agency representing them,  who pays that agent if the listing agency has a policy of no co-brokering arrangements?  Most potential business buyers are reluctant to compensate someone to find them a business to buy (Mergers and Acquisition deals are handled totally different, I am talking about transactions typically of $4 million or less).  My response to a prospective buyer is that I represent the seller but my obligation to the buyer is to treat them fair and honestly.  However, I then recommend to them to find legal and financial advisers to work with them on their side of the transaction when they deem it appropriate and necessary (particularly in the due diligence process).

To continue…..buyer needs & business valuations  – Dan

We have talked about EBITDA, Cash Flow and Discretionary Cash Flow.  Please be advised that disagreements can abound regarding my interpretation of those nomenclatures and or words above used in identifying a basis for valuing a business.  No one is wrong! It becomes a matter of approach and opinion.  Like my great Granddaddy said when asked how much his old model A Ford was worth?  “Well son,” he said.  “Depends on whether you are selling or buying.”  Those words of wisdom have stuck with me, but I can also tell anyone (willing to listen) that “nothing is sold that cannot be financed”.  The financial data in a business is important and can be used to identify strengths and weaknesses of a deal.

When analyzing a business, I request from the prospective seller the last three years tax returns along with P&Ls, balance sheet that coincides with the tax returns of the business, an interim profit and loss statement for the current fiscal year, and a current balance sheet as well.  When I am doing my analysis of the financial data I am looking for trends of the business occurring in the financial data.

1.)     Revenues – are sales increasing year over year or decreasing

2.)    Cost of Goods Sold – how does this business stack up in relationship to the industry standards?  Is labor included in COGS, etc.

3.)    Gross Profit – a very important indicator of the business and the ability to be successful.  Gross Profit can be called “Gross Margin”, in any event it is a critical component to be scrutinized thoroughly to better understand the business.

4.)    Expenses – reviewing all expenses can help you better understand the management philosophy of the current owner.  For example an owner may choose to pay employees benefits for health, retirement and other expenses or they may not.  Some expenses can be eliminated with new management and some may not.  How much does an owner pay themselves through Officer’s Salary?  All expenses need to be scrutinized as this is the area that can reflect more variable cost (which are controllable) verses fixed cost (which will continue to occur in the future).

5.)    Net Income/Loss – is the business making money year over year or losing money.  Again small businesses minimize profits to minimize tax liability so that is why COGS, Gross Profit and discretionary spending become so important to review and understand.

6.)    The Balance Sheet – very critical to your analysis as this is a “snapshot” in time of the financial condition of the business.  Understanding a balance sheet is important to identify working capital needs and financial needs of the business.

To summarize, it is important for sellers and buyers to understand the financial data of the business that they own or are thinking about buying.  That is why a professional business broker or business consultant can become so important to an owner wanting to develop an exit strategy for their business.  In addition, prospective buyers of a business should expect the broker or consultant to be able to provide them with ample financial information about a business provided a confidentiality agreement and financial statement have been provided to the broker from the buyer.