All posts by rickandrade121

Small Company M&A can be like an “Arranged Marriage”

While hundreds of small businesses changed hands this past year, few were lucky to be asked by one of the world’s largest CPG companies to join the family. And of those small mostly innovative start ups that make the cut, even fewer ever reveal the inside story about what it is like to wake up one morning rich beyond your dreams from an arranged corporate marriage the night before. But here it is. In this eye-opening  article by Tom Foster, Editor-at-large for Inc Magazine he lays out the pros and cons and big changes in this candid interview with owners selling their fledgling business to a mega-giant.  (click on the link above or here to read more about it}

Rick Andrade

M&A Advisor
Managing Director
JANAS Associates
www.janascorp.com
www.linkedin.com/in/rick-andrade-987a42
Securities Licenses: Series 7, 63, 79

Investment Bankers &
Management Consultants
141 S. Lake Avenue, Suite 102
Pasadena, CA 91101
Phone: 626 432 7000

Goldilocks has Come for Dinner Is Your Business Ready?

Consider this;  the US economy grew at an impressive 4.2% annualized growth rate in the second quarter of 2018. This figure was revised upward reflecting more business-spending on software, and the forward trend looks to sustain a robust 3% annual growth rate for all of 2018.

The last time that happened was 2005. And things continue to look good economically now and for the next six months. But as the economy starts to cool in 2019, will Goldilocks stick around after dinner?

As of mid-September, all three major stock index averages, Dow, S&P, and Nasdaq are at or near record highs. And with unemployment rates lingering below 4 percent consumers are not only busy working, but also busy spending. The evidence is all around us.

And I am confident you can feel the growing enthusiasm when you speak with customers and employees who will likely altogether contribute well to the bottom lines of American businesses this Christmas season.

As far as consumers go, despite all the media head-fakes and White House melodramas this year the typical consumer seems oblivious to all the noise, like a 3-year-old at Disneyland.

And given that our U.S. economy runs on 70% consumer-driven spending for fuel, it is probably a good idea to keep them in La-La Land for as long as we can.

But as the party continues outside, I am also hearing from the subtle concerned voices inside about what if anything a CEO or business owner can do to prepare for a potential downturn (aka future recession) and stay one step ahead of their competitors. Hence the question:

How long will Goldilocks have her way in this late stage Bull Market for business?

While recent changes to US tax laws have triggered part of the recent boom; The Tax Cuts & Jobs Act of 2017 as you know substantially reduced individual and corporate taxes, and also lowered the tax bite to repatriate billions trapped offshore in business accounts.

The key drivers behind this market’s bull run for business is the euphoria consumers feel from their 401k balances and job prospects. US workers are quitting at the fastest pace in 17 years according to the Labor Dept. report.

Workers tend to quit their jobs when new job prospects appear more abundant. The JOLTS (Job Openings & Labor Turnover Survey) recorded nearly 7 million job openings as of late, a new record. And when people have job security, they tend to spend more on discretionary fun stuff, like trips to Disneyland. It’s all great fun until somebody pulls away the party punch bowl.

So now what? Should you keep your head down and hope for the best?

A few key measures to keep your eyes on may help avoid falling into a deep recessionary trap in the months ahead.

Start with how the political winds blow this fall after the November 2018 mid-term elections. If the Republicans stay in control of Congress, we should expect to see more of the same pro-business policies. However, if the Democrats win, all bets are off because the Dems will most likely refocus their political agenda to impeach and undue all that President Trump has endeavored to repair after decades of Washington mismanagement and neglect to help preserve American business’ competitiveness in this country and across the globe.

But Washington policies and politics alone are not the only foreseeable risk: If you are a CEO, pay attention and take action at the first signs of trouble. Here are three crucial key trend indicators to watch:

  • Escalating Signs of Inflation: especially wage inflation lurking nearby, but also commodity input cost inflation, some which we will likely see if tariffs on Chinese imports increase. If you start seeing signs of rising costs, you need to immediately focus on margin gaps and inventory costs. Calculate how much you can absorb before increasing prices. You will need to absorb the difference and if that becomes a problem in your profit forecasts you should consider not carrying higher levels of inventory (on lower margin products) in 2019.
  • Escalating Cost of Borrowing: will trend up later this year as the Federal Reserve Board votes to raise benchmark interest rates (borrowing costs) again to incrementally try and slow growing signs of inflation from this 10-year-old economic bull run expansion. Ahead of this, be sure to re-secure any long-term debts at lower fixed-interest-rates now. And any short-term borrowings aka Lines of Credit with adjustable interest rates should be paid off or swapped into long-term fixed-rate loans. Don’t delay. Once interest rates go up it could take a long time before they come back down, meaning the cost of business in the future will go up. So, act now and call your lender to discuss this timely critical issue, and how they can help you plan for it.
  • Escalating Trade Wars: not knowing where, when, or how US Trade sanctions could affect your supply chain and customer accounts be prepared to absorb short-term cost increases internally, and try to make up for it by cross-selling more services like 1-day delivery (see my article CEO World Magazine.com; Winner Best Product 2018: Speed). But the best way to avoid the impact of a trade war in the meantime is to offer more products genuinely Made in the USA that Americans want to buy.

As we head into the final Quarter of 2018, America businesses will likely continue to see a robust demand market and a very Merry Christmas as cash registers ring up big sales this December.

The important thing to recognize here is to be ready to act quickly to the first signs of anything that could trip up those sales or profit margins. In 1999, Andy Grove, former CEO of Intel wrote the best seller: Only the Paranoid Survive… which can still save many CEOs from disaster. Read it, and you’ll learn how too. In the meanwhile, let the good times roll, but let’s also keep an eye on little Miss Goldilocks this winter. She could shake things up looking for a warmer spot elsewhere come January 2019.

Make sense?

Goldilocks has Come for Dinner Is Your Business Ready?

 

Winner: Best Product 2018

Have you heard the news? According to NASA, planet Earth is slowing down thanks to the moon. And in a mere 180 million years or so our planet’s 24 hour-long day will slow, adding a full hour to each day. Wow. That’s welcomed news. Because while NASA is busy studying the impact of a slower future, these days if you’re in a business, being too slow is the kiss of death, because Speed is the new currency of convenience, thanks to the internet, and Amazon.

I know what you’re thinking, speed (aka being fast at something) is not a new concept to CEOs and business owners; rather it’s been around for a very long time especially as a customer-centric sales strategy. This time is different though. Because while companies struggle to identify more ways to stay ahead in the game, delivering high quality products is still #1, and being environmentally responsible is also still #1, and being socially sensitive is still #1, and being the top drawer most awesome customer friendly business ever is still #1. While all these compete for resources to drive new sales, Speed, which translates into convenience is the new #1, And by passing them all, ‘speed’ has recently become its own product category addition, racing past the rest to become the newest must-have competitive differentiator for nearly all businesses everywhere today.

The upside for the winners (aka younger new market entrants and early online adopters) is increasing sales, increasing marketshare, and a chance to shake up the old line status quo; All this by recognizing how adding “speed” as “convenience” in every conceivable customer-centric way to their core value proposition is genius! The downside for the laggards is a bumpy ride down the rapids; losing existing customers, new customers, and hard-earned profits – maybe forever.

So how is Speed related to convenience?

To a business speed is a simple thing defined as “removing the bottlenecks in any process.” To your customer though, it’s more like “a faster order-to-delivery cycle time experience that satisfies.”  In other words, in your customers’ mind they want everything faster. Do you know what that is worth to them? Turns out, increasingly it’s a lot! Convenience means that your customers have better things to do with their time than to wait for you. Waiting at a loading dock, or in line at a restaurant is no fun. Give them back some time and your customers will reward you – becoming more loyal and satisfied. This in particular explains why delivering speed, for example, created a dozen new delivery services in the food industry.

So how did we get here? And why is speed the best new product?

30 years ago in 1988 there was no internet as we know it today. And as large Consumer Packaged Goods manufacturers dominated consumer purchasing choices by controlling end-to-end how a customer perceived value and convenience, retailers let them do it — because it helped drive traffic. But even after the first “.coms” came on the scene in the mid-1990s many would have expected the internet to have completely dissolved the old-school formulas years ago. But of course given the intervening Financial Crisis aka The Great Recession slowed things down, a new catalyst was needed. I’m talking about Jeff Bezos, Amazon, and the instant addictive satisfaction we all get from convenience at the push of a button.

The result is a renewed feverish increase in the pace of business transactions that is today part of Web 3.0 – companies using Big Data, Robotic Automation, Artificial Intelligence, Amazon and Uber, are all together elevating the need for speed as convenience in favor of embracing a new utopian customer-centric “deliver to us everything now internet model.”

But as many business owners and CEOs are still slow to adopt, they are now consequently looking up at a fracturing water dam wall about to burst down on them. Yet these companies, reluctant laggards, are still building products the old way, still selling to customers the old way, still advertising to customers the old way, and still hoping business will go on the old way… But it won’t and companies caught behind will go under.

So what should you do now? And can you fix it?

Yes. You have already most likely given this some deeper thought as you sense the ground shaking. But all will not survive the deluge. Here’s why. Remember these two existential questions your strategy consultant once asked you to think about separately?

  • Why does my business matter?
  • How does my business matter?

Well they’re not separate any longer. Because while nearly all CEOs can answer ‘Why’ their business matters, many at the same time are learning it’s not enough. Because the ‘How’ your business matters is newly arrived at the top of Why your business matters today. And as it turns out (at least in my experience), nobody really cares about Why your business matters. Customers don’t. They only want to know How you can help them, right now. Because companies like Amazon and those that followed have finally and completely redefined the old internet shopping experience, and perhaps inadvertently created an entirely new categorical customer expectation not only for B2C companies but also for B2B companies as well. Take note! Today, the new perception of added product or service value is speed as convenience. And it’s like striking gold if you get it right, especially if your customers think it’s free.

There is however still the matter of How your business matters, because How it matters these days is quickly outpacing Why. In other words as more and more higher quality products all compete for the same, increasingly online sale, the new best product offering for How a business matters is SPEED. Not just slashing delivery times to the home, but in every aspect of your business, from supplier-to-manufacturer –to-retailer. The entire business value chain in cycle times is now on steroids, and will soon be poised ‘at the ready’ to please any customer, anywhere — instantly. And if you don’t prepare for that reality now – you’re going to feel it.

 So here’s the key takeaway

Once treated as an add-on feature at the bottom of your web page, speed as convenience is now at the top, winning over new customers and increasing sales from newer competitors. This makes SPEED; the hands down ‘winner of best product for 2018.’ Because regardless of your size or market share, big or small, as all businesses switch targeting from a “mass” market to a “me” market, from front office to rear dock (if you want to survive), adding speed and selling it as a differentiating competitive feature that delivers convenience is what is winning the day; Something that could help save a lot of slow-to-adopt laggards when the dam breaks from smashing up against the rocks.

Make sense?

Rick

There’s Something About 2018

It’s been 10 years since the start of the Great Recession which officially started Dec 2007 and lasted until June 2009, and was to-date the deepest and longest recession since the Great Depression, hence the comparative name.  But in all these past years as the planets shift above, the world below seems to have aligned economically to make M&A and all of finance an active place to engage and growth with.

Since President Trump’s election in November 2016 his desire to reset our economy on his terms has been on a frantic pace. And whether or not we find this president’s style a bit heteromorphic has little to do with the reality behind the raging bull’s impact in the 18 months since the election. “It’s Trumponomics silly.”

  1. Lower Tax rates: corporate and personal income taxes are down. This fiscal stimulus is just getting started and includes among other things the repatriation of nearly 2-Trillion in funds held offshore being brought home by big corporations. The 2017 Tax Cuts and Jobs Act should continue to boost 2018 M&A activity for several months.
  2. Unemployment: rates are at a 30-year low. Yes. If you want a job they are aplenty these days. And while this will increase the cost of labor for business, the flip side is more spending in an economy where 70% of GDP is driven by consumer spending and that’s great for all businesses.
  3. Stock Market: stocks have seen a monumental increase in the last 18 months. The DOW for example was 18,332 on election day November 8th 2016. By April 13th 2018 the DOW topped 24,360, a 32% increase in 6 months. If it holds up (so far so good) it will mean that we haven”t seen a move that big in a long while.
  4. CEO Confidence is way up. According the NFIB, CEO confidence racked up another record.  Here’s the official quote: “The small business optimism index reached its 16th consecutive month in the top five percent of 45 years of survey readings, according to the NFIB Small Business Economic Trends survey… The 104.7 March reading, down from 107.6 in February, remains among the highest in survey history.”
  5. Consumer Confidence:  hits an 18 year high in February 2018. Consumers do feel wealthier as the impact of lower payroll taxes kicks in and 401k balances rise.

These are but a few of the good times in 2018 thus far, making this year a super hot market for M&A. But how long will it last? Critics and pundits, economists and stock-market traders all agree: there’s something about 2018, and smart people will recognize this unique time as a golden opportunity to make the most of it: Which begs the next question…

What could cause a downturn from such great heights?

The list of prospective issues that could become headwinds later in 2018 and into 2019 is long, but keep your eye on these 4 keys indicators for hints:

  1.  Trade wars: President Trump is pushing back on perennial trade rule violators like China and is willing to take a short-term trade hit for a long term gain says the White House. That is tough language for M&A.
  2. Recession: It’s long over-due. As the 2018 U.S. Bull-market economic expansion period (now in it’s 9th year) has become the longest Bull-market run since World War II.
  3. Interest Rates: Finally the 10-year benchmark treasury ( a key driver of consumer loan rates from credit cards to home mortgages is on the rise as the Fed expects to slowly raise rates each quarter this year. This means that lenders (Banks) will in-turn increase loan rates for consumers and small businesses nationwide.
  4. Inflation: With a super tight historically low unemployment rate (4.3%) the US economy will soon face a deepening labor shortage, and this time the tech/robot replacement trend may not be able to keep up. This will bid up the cost of wages. Moreover, as the general demand for goods increases with higher wages and consumer spending, prices for commodities, food, and housing will also trend higher under these macro demand pressures.

So far, however, none of these nor a dozen other indicators have yet to show real material signs of caution, and while pundits will argue of choppy waters ahead, they also say that the 2018 global economy has a strong chance to outperform across the board and into 2019.

What should you do now?

In summary, if the headline Tweets are keeping you on the fence about what to do in 2018, don’t panic, you’re not alone. But, at the same time don’t just stand there with your hands behind your back waiting for something to happen to you. There’s something about 2018 that is presenting to you a once in a long time opportunity to use the increasing value of your business to grab market share and dominate. Take a close look at your industry and you will see big-fish M&A happening all around you. And that may be perfectly fine. But remember, at some point all the little fish get eaten.

Rick

A Forgotten Depreciation Strategy Makes a Comeback –

By Rick Andrade –  Nov 2017

For baseball pitchers it’s all in the wrist. For Tax Advisors it’s all in the code. And when it comes to real property depreciation policy and methods, we all know there’s an abundance of tax code.

And despite recent tax relief talk in Washington, one depreciation strategy is making a strong comeback. It’s an old method that reclassifies real estate assets from long term recovery periods to short term recovery periods (aka accelerated depreciation). It’s called Cost Segregation (CS) and it’s been around for a while but in an earlier incarnation called “component depreciation,” whereby an owner of a new commercial building or one making substantial improvements to existing commercial real estate can segregate specific real estate assets into separate depreciable component groups.

These subcomponent groups such as lighting, doors, floors, walls, etc. can then be depreciated individually over shorter lifetimes such as 5 years, rather than being lumped altogether with all building assets in a general bucket and depreciated over a much longer 39 year recovery period, under the current MACRS method.

The immediate benefit is increased after-tax cash flow, meaning that by adopting a CS depreciation expense strategy, your depreciation expense/ write-off is much higher, more front loaded, and thus reduces your business tax liability. Furthermore, new tax modification acts in 2001 & 2003 provided that if real property is reclassified from 39 yrs. to the shorter 5yr, 7yr, or 15yr periods, there is an additional bonus catch-up recovery provision which can further accelerate depreciation expense by 30% – 50%. Sounds good right?

So. If it’s more valuable and perfectly legal, why don’t more CPAs & Advisors use it?

Because most advisors simply don’t have the right detailed cost information for each component of a recently purchased building or accurate cost records for individual building components to do the job. While there are several CS methods that can be used to estimate component costs separately, risk-averse tax advisors still resist efforts to calculate the cash flow benefits. Rather they prefer any method that is least likely to get audited approach first. But this fear is likely overblown and misplaced.

Enter your Cost Segregation specialist firm. These consultancy firms, or CPA firms with add-on CS services, specialize in reviewing, and completing engineering studies, and component cost analysis using IRS rules of the road. Result? Once armed with a detailed Cost Segregation report, business owners who acquire real estate assets or make large building improvements can save as much as 5% in taxes on every $1 Million is real estate asset dollars deployed. Translated, a $10 million RE investment could provide as much as $500,000 in real tax savings! And those are hard dollars that can be put to better use elsewhere in your growing business.

So what exactly is Cost Segregation?

A Cost Segregation study is a detailed review and cost breakdown of a real estate investment allocated into four (4) key categories:

  • Personal Property
  • Land Improvements
  • Building
  • Land

Exactly which group a real property investment component falls into is where the rubber meets the road. In many cases after a building is acquired in an M&A transaction for example, the CPA will use a current appraisal, or worse, allocate 20% to land and 80% to building and fixtures as an old general rule. Land has no depreciation expense value, and the building overall has a 39 year straight-line recovery period under MACRS.  This approach offers no accelerated tax relief because it does not attempt to isolate and identify the costs of building components separately. The 80/20 grouping also fails to specifically identify and therefore write-off any specific cost for major replacement components such as a roof, loading dock, electrical stations, removable HVAC systems, and dozens more areas.

A better way is to first see if a cost segregation study will save you enough tax money to justify the cost of the CS report, which can range in price for middle market companies from $5,000- $15,000 or more according to KBKG a tax advisory firm to CPAs. And to figure that out, the CS examiner will re-allocate your purchase price or cost of improvement into these four buckets and then compare your current depreciation method to the cost segregation results. Experts say the more detailed a real estate asset can be broken down into its individual cost components the more likely a cost segregation study will pay off.

Who Gains the Most by Using CS?

Acquirers of existing commercial real estate and new construction benefit the most because they have the benefit of conducting a new CS upon acquisition, or by gathering the most accurate cost information documents while new construction or improvement work is being completed. The IRS will disallow a cost study based on older construction or engineering documents that don’t accurately link construction costs to component costs according to a Rutgers University analysis.

Done right, that is, using the IRS Audit Techniques Guide for Cost Segregation, however, high tax bracket real estate business owners can potentially save as much as 5% in taxes for every $1 Million invested in a real estate purchase or development. The actual savings are based on which tax rate bracket the owner falls into, and the amount of depreciation expense benefit when compared to other depreciation methods. In most cases the higher the tax rate… the higher the CS savings.

The real trick is to justify which cost components fall into which of the four key groups above.

For example, typical building component groupings include items such as hand rails, wall or floor coverings, light fixtures, plumbing, electrical and HVAC systems with a 39 year life. However, a proper CS study can potentially group all of these building assets into a much shorter depreciable life, including moving assets from 39 years to just 5 years.

For example, in the 1997 landmark case Hospital Corporation of American v. Tax Commissioner, the tax court held that HCA could re-allocate dozens on 39 yr. life building component-assets down to 5 yrs. including:

  • Primary & secondary electrical systems
  • Lab & maintenance shop wiring including conduit boxes
  • Carpeting & wall coverings
  • Special plumbing installations
  • Kitchen hoods & exhaust
  • Patient handrails
  • Accordion doors & partitions

Other overlooked examples that can qualify for 5yr depreciation include: signs, security systems, un-affixed cabinetry, fire suppression, accent lighting and dozens of others.

Warnings, Pros & Cons

The advantages of CS are clear: lower taxes, more after tax free cash flow, identifiable asset write-offs, bonus depreciation options, and a host of other benefits according to Ernst & Morris, a Georgia-based Cost Segregation consultancy firm.

The disadvantages include the risk of having to recapture the advanced depreciation tax savings if you dispose of the real estate within a few years after your investment. A second risk is conducting a poor CS report that fails to effectively link building and land improvement components to their cost documents. And lastly, being too aggressive in re-classifying assets as tangible personal property vs structural components (inherently permanent as affixed to the building), can raise a red flag. Speak with your advisor about all the risks.

Conclusion

Nevertheless, in many cases the overlooked CS study approach is definitely worth a closer look for business owners, or private equity investment firms who own or plan to own commercial real estate.

Properties either recently acquired or improved in excess of $1 million may well benefit from a CS study. There are many Cost Segregation advisory firms you can find online. Once you find one you like, ask for a free upfront review of the numbers that compares depreciation strategies. Each firm should also provide an estimate of the CS study cost/benefit, timeline, and discuss the methods they use to complete the study.

Finally, at the end of the day, if you see yourself making a large real estate investment in the coming months… consider doing a CS study. You might find the time & benefits of having more free cash-flow upfront to kick start or reboot your real estate investment easily out-weighs the cost.

Make sense?

About the author: Rick Andrade is an investment banker at Janas Associates in Pasadena, Ca and finance writer in Los Angeles helping CEOs buy, sell and finance middle market companies. Rick has earned his BA and MBA from UCLA along with his Series 7, 63 & 79 FINRA securities licenses. He is also a Real Estate Broker, a volunteer SBA/SCORE instructor, and blogs at www.RickAndrade.com on issues important to middle market business owners. He can be reached at RJA@JanasCorp.com. This article is for informational purposes only and should not be considered in any way an offer to buy or s

Putting the Brakes on BIG Decisions –

Get it done and get it done fast! This is how CEOs are measured today. See a problem, fix it, and move on to the next one, the faster the better. The old “Time is money,” has given way to the new “Speed is money.” And in the world of constant everyday decision-making, speed always makes sense. Sound familiar?

But when you’re in the world of BIG decision-making, speed is completely the wrong approach. To suddenly switch gears from high to low is not always so easy to do. Like sex; in most cases ‘speed’ is not the #1 ‘get it done’ best approach, rSpeed Trapight? Yet, this is where speeding past the risk factors can get you into real trouble.

Think about the analogy. If you have sex at the same breakneck speed that your Board of Directors pays you to make decisions, then I fear you stand a higher chance to completely underestimate the risks that a sloppy performance can have. And that’s my whole point. Remember any decision worth making is only right when it successfully achieves the ‘expected outcome’ [read my article: The 6 Key Principles of Decision.] But enough about sex.

When astronauts Neil, Buzz and Mike all returned from the first Moon landing mission in Apollo 11 in 1969, it was only a good decision to go in the first place because they came back in one piece. That was the expected outcome. Such precision however also cost us all millions of dollars and years to plan for. In that example, making a speedy decision took a back seat to making a Quality Decision.

It reminds me of a funny John Deere (new riding lawn mower) Tv commercial: two neighbors zipping around atop their new Deere mowers, and maybe to justify the likely higher price of their new toys bellow out to their wives:  “It’s not how fast you mow; it’s how well you mow fast.” And who would disagree with that? High Quality results are always worth something extra. But that is not the only message here. The other message suggests that when speed increases, so do risk levels. And when risk levels get out of control, you need to slow down and readjust your thinking and approach.

For example, the old standard sales question from your stakeholders asked ‘how will you increase sales next year? But when facing a BIG decision, that is no longer the right question. When risk goes up the right question is not ‘how much will you increase sales by next year, but rather, ‘how well can you lower the risks that sales will decline next year?’ Maybe John Deere has it right.

Listen… we all know that every business has everyday risk factors, but when BIG decisions are involved risks are amplified. And when risk levels become elevated the consequences for getting it wrong can be a real mission killer. In other words; it could mean lights out for you and your business… So how do you reduce the levels of risk amplified when making BIG decisions?

Regardless of your luck or talent, as CEO, making BIG decisions is par for the course and will always mean tradeoffs… But when you do find yourself barreling forward into a BIG decision and you don’t have weeks of time, and NASA’s endless budget to attenuate risk factors…don’t get overwhelmed. Before you pull the trigger, try these (4) Emergency tips. They have proven to get CEOs past a speed trap or two when they can’t slow down:

  • Call & consult an SME, (subject matter expert) if possible
  • Identify & focus on measurable results your BIG decision expects to achieve
  • Show confidence in your BIG decision and others will follow
  • Be nimble & flexible before you pick a costly fight

And remember, in this new era of CEO performance where Speed is Money, “it’s not how fast you make decisions, it’s how well you make decisions fast.

Make sense…?

Rick

“Some Guy Called… Says he wants to buy my business”

If I had a dollar for each time I heard that I would have well over 100 dollars! Not a lot of money, but it is a lot of business owners who get calls, emails, letters, and visitations from prospective acquirers, all saying the samCold Calls Imagee thing. “I have a buyer for you Joe, and they will pay you top dollar for your business, interested?”

Now what? Should you take the call?

It’s natural, as a hard-working business owner, to want to hear from someone that says your business is worth a pretty penny. And if you are nearing retirement, you might be thinking about this very thing. What is the value of my business? And does this guy really have the money to buy it or just fishing for new business…?

As a result in this note, I want to briefly address one of the most burning questions you as a potential seller will have before you answer that call.

Who are the REAL prospective buyers for my business?

In general, below $10 million in annual sales is the Business Broker Market. If your business has sales between $10 million and $100 Million per year, your business is classified in the “lower middle market” of all size businesses. Above $100 million there is the “middle market” whose range extends from $100 million in annual sales to $500 million in annual sales. And above $500 million in sales is the “bulge-bracket” market. These are the larger private or public companies like the Dow 30 or S&P 500. This market is an entirely different world of mega buyers and sellers. And not likely to call you unsolicited to buy your business…  But the other markets are each fair game for cold callers.

The reason these markets are broken down this way is mainly because bulge-bracket advisors like JP Morgan, or Goldman Sachs have a lot to choose from among higher end M&A transactions. As a result, there has been traditionally enough business for these big firms to slice the M&A market pie into smaller sub-market segments, like the middle and lower middle market ranges, and so on.

Nevertheless, in nearly each market segment the buyer “pool” is generally comprised of two types of buyers who are actively looking to acquire your business. We call them Private Equity Groups (PEGs), and Strategics (industry competitors).

Let’s take a closer look at these two groups, and see what they want from you.

 

Private Equity Group Buyers, and what they want

Private Equity Group buyers are the more diverse of the two groups. These companies range in size, and target acquisitions based upon the size of their investment fund. These investment funds which can range from several hundred million to billions in investment capital. These funds are raised from various sources such as pension funds, endowments, public & private trusts, investor pools, and wealthy individuals who all commit to invest when a prospective seller appears on the scene.

Selling to a PEG is not the same as selling to a Strategic buyer. PEGs have to reach specific IRR returns to their investors generally over a 5-7 year period. This means that your business will need to meet specific profit and growth metrics before they will invest, ie) buy your company. This proforma approach to buying businesses as a result can be risky, especially if the PEG adds little more than money to the equation. Consequently, PEGs may not pay as much as a Strategic acquirer who knows the industry and can exploit synergies to save money or increase sales after they acquire your business.

Strategic Buyers, and what they want

Strategic buyers on the other hand want more customers, more operations, more products, services and profits, etc. These are the M&A transaction reports we hear about on the news regularly buying each other to grow vertically in the same industry. Strategic buyers may pay more for your business because they may see more ways to cut redundancies after combining your business with their business, and hence save money on the deal. Strategics may also be able to increase sales to your customers using their products & services. That in turn could also enable them to pay more for your business.

So whether these cold-callers are PEGs or Strategic buyers just know that these first-contact callers are merely fishing expeditions. They may say or even promise a host of possibilities to get you to say yes to a visit. But once you agree to a visit, you could get locked into believing anything is possible.

What to do when a Prospective buyer calls

If you get a cold call from a prospective buyer, tell them “no thanks, I’m not ready to sell my business at this time,” and hang up. This is the best way to preserve the value of your business. The reason not to engage any cold-caller (even when you’re ready to sell) is because it’s not a real market. It’s a guy fishing for a sale, and if you are not yet represented by an SEC/ FINRA licensed advisor like me, find one. These licensed pros may not only find more than one prospective buyer to compete for your business, but they may also likely negotiate a better deal with the buyer that finally does make the most sense to sell to.

Oftentimes sellers who don’t have seller representation are taken advantage of. For example. Let’s say you are a lower middle market company in the manufacturing industry and you agree to meet with a prospective buyer after a cold call. During the meeting you may even all agree on a purchase price. But soon after supplying the buyer with 3 past years of confidential financial and customer information, the buyer decides to reduce the offer price. Why did they do that? Because your sales were flat three years ago and that could be a risk. Now what? With no back-up offers, or no one to help find a back-up offer, you are left holding the bag, at which time many sellers find themselves boxed in and compelled to take the lower offer price. But there is a better way.

How to avoid the cold call trap

When the time does come to hire a professional to evaluate, prepare, and confidentially market your company to all the best prospective buyers, not just one or two, call me. As a licensed FINRA representative I can better help you navigate the complex world of middle market M&A transactions, and in turn potentially save you a lot of time & money preparing you and your business in the best way to the best buyers, for the best price… that’s what I do.

So when the time comes to consider taking a cold call from a prospective buyer of your business offering you pie in the sky… Just say “No! I already called Rick Andrade, he’s our M&A guy.”

Rick Andrade

Re-Made in America: Before Trump, After Trump

Rick Andrade – Los Angeles, CaRe-Made-in-America-400x240

Regardless of how you voted last November 2016 for US President, the results of a Trump victory are shaking the pants off corporate board room execs from here to China and back. Weeks before becoming President Mr Trump seemingly in a matter of ‘Tweets’ reversed the course of U.S. manufacturing outsourcing, and perhaps ushering in a new paradigm for global players.

But what does a Trump era presidency really mean for U.S. jobs and business in 2017?

Before Trump, After Trump

Before Trump, American businesses went about business as usual; The Goal; find more ways to make more money for shareholders… and that meant finding or creating ways to reduce the cost of doing business. Most notably over the last 5 decades U.S. companies sought to reduce the cost of both labor and taxes. These two because the rest of the world noticed that U.S policy-makers had fallen behind in these areas, and hence indirectly created a competitive opportunity to offer big companies a lower-cost of business as incentive to leave America and move offshore. And it worked; as the chart below indicates; the rate of outsourcing of U.S. jobs was flat… until 2002 when the internet and globalization strategies began to develop them more broadly.

Add ‘Before Trump,’ and over the last 15 years, the internet, and new technologies have quickly enabled and accelerated ‘corporate globalization,’ which in turn enabled the free flow of investment capital, and manufactured goods & services across borders.ReMade in America article chart-jobs outsorced

That, in turn enabled manufacturers to more easily establish operations in lower-cost countries to save money and export their wares back into the USA. In fact, from 2000-2016 dozens of well-known U.S.-based companies have relocated their corporate headquarters offshore specifically to avoid or reduce the cost of labor, and taxes. All combined, these companies have more than $2.5 Trillion in profits waiting to be repatriated back to the U.S. — but not at the “Before Trump” tax rates.

After Trump, things will change. No longer will mega multi-national companies with the resources to take advantage of new technologies, favorable U.S. tax & trade laws, low-interest capital, cheap labor and low regulation requirements easily take advantage; Because what was once good for business has not been good for low-skilled American workers in pursuit of the ‘American Dream.’

Rather, decades of job losses, inner city disenfranchisement, and the growing gap between rich and poor has taken its toll on American prosperity for many. The evidence by the numbers is clear. Since 2000 the U.S. lost 5 million manufacturing jobs to other, more cost competitive (lower wage) countries, according to Money Magazine. Moreover, as much as 20% (1 million) of those jobs were lost as a result of the once popular North American Free Trade Agreement (NAFTA). In their place, 5 million low-wage service jobs were created in the U.S over the last 8 years.

Enter Trump. Nothing like him said the political class. Can’t win, won’t win, shouldn’t win, you name it, every dog piled on. But nearly all the predictions were wrong. Because what was once the silent majority awoke to collectively storm the ballot boxes in an effort to take back and re-direct the economic direction of our country. And when the dust settled, like out of an old Clint Eastwood western movie, the new sheriff’s in town. And this one’s promised to really shake things up, bring back jobs, rollback regulations, reduce taxes, and revise a costly healthcare system for all Americans, and American businesses. President Lincoln in his first address to Congress in 1861 said: “Labor is the superior to capital, and deserves much the higher consideration.”

So will 2017 be a banner year for American business, for growth, for prosperity?

According to the NFIB small business survey at the end of 2016, small business CEO confidence registered its highest level since 2004, a 12 year high. And since Trump’s election victory several U.S.-based manufacturing companies, including Apple, Boeing, Caterpillar, Ford, GE, United Technologies, and others have announced plans to re-shore thousands of jobs back to the U.S. And don’t forget Amazon which announced it will hire 100,000 new full-time U.S. staffers over the next 18 months.

Looking ahead at a Trump-era presidency

While we all love the ideas Mr. Trump has espoused to “reset” the relationship between global businesses and global governments, we also fear the return of trade wars, currency wars, and real wars. These are all real downside risks.

Still, as we watch the U.S. stock market tip over DOW 20,000 for the first time ever, it reminds us of America in the roaring 1920’s, after WW I, when President Coolidge and the America people felt on top of the world and prosperity reigned for nearly a decade before the big market crash. Today, nearly 100 years later it once again feels like America is entering a period of ‘America First” euphoria… where all things will be better than before, for everyone, as long as they reside legally in America.

As for our biggest trading partners in Europe and Asia…A Trump-era Presidency might see a regressive import tax which could raise the cost of some favorite toys like consumer electronics, and autos… But that just might be the price we pay for a while to focus on ourselves, and let the rest of the world fend for themselves. And maybe that’s a good thing…as we stand witness facing the pros and cons of something really big being ‘Re-Made in America:’ Us.

About the author: Rick Andrade is an investment banker at Janas Associates in Pasadena, Ca and finance writer in Los Angeles helping CEOs buy, sell and finance middle market companies. Rick has earned his BA and MBA from UCLA along with his Series 7, 63 & 79 FINRA securities licenses. He is also a Real Estate Broker, a volunteer SBA/SCORE instructor, and blogs at www.RickAndrade.com on issues important to middle market business owners. He can be reached at RJA@JanasCorp.com. This article is for informational purposes only and should not be considered in any way an offer to buy or sell a security. Securities are offered through JCC Advisors, Member FINRA/SIPC. 

Rejected! Why thousands of Business Sellers won’t find a Buyer

Forget about getting a low-ball offer from a potential buyer of your business. How about a “no-ball offer” for your business?

It happens more than you think. Thousands of businesses each year go unsold. Many of these are simply too small, too dependent on the owner to survive, or simply have run out of stream. But these are not just mom and pop businesses either. Even larger and more established businesses don’t find buyers. You can find dozens and dozens of articles, blog posts, and videos trying to get their arms around the “why.” Studies, surveys, and polls all cite to this growing Seller’s abyss where some say a mere 20% of all businesses listed are sold, where 50% of purchase agreements never close, and where 90% of buyers don’t’ find the right business investment that makes the cut… Add to a seller’s challenge the coming wave of Baby-Boomer business owners all looking to cash out and retire in the next few years, all flooding the market, and looking for buyers atready-to-sell-or-not the same time. Sound scary?

Imagine after a year trying to sell your business you later find out too late that your business was in the abyss after all. And given a chance to go back in time and take a closer look at why, you learn firsthand the reasons. You discover that businesses across the board, from those with annual sales as low as $100k to as much as $100M and higher can fail to find a buyer to take the business to the next level.

To illustrate the “why”, take a look at this chart to the right: green is good, orange is bad. And thus from the buyer’s point of view it doesn’t take long to compare a good investment from a bad one. Just ask somebody who reviews these deals every day, like me. Or ask yourself; Does my business have:

  • Reliable Revenue Streams
  • Solid Dependable Annual Growth
  • Independent CPA Reviewed Financial Records
  • Operating Performance metrics at or above industry norms
  • EBITDA Margins at or above industry norms
  • Proven, results driven Mgmt Team Leaders

If so… you’re in the lucky green Ready-to-Sell column on the left. But if you’re not green, or if some measures are green and some are not, take some time to evaluate and improve the Sellability of your business before you call your broker and expect miracles.

According to Pitch Book, which tracks companies sold to Private Equity groups, seller multiples in 2016 are at their highest point since 2013. Making this year a strong market for strong companies and owners looking to sell. And who doesn’t like selling at the top?

So study this chart, and learn more about these simple measures of how well your company and management team measure up to what buyer’s expect most. Because when a business falls into the abyss, you can almost always find the “why” somewhere on the right hand side.

About the author: Rick Andrade is an investment banker at Janas Associates in Pasadena, Ca and finance writer in Los Angeles helping CEOs buy, sell and finance middle market companies. Rick has earned his BA and MBA from UCLA along with his Series 7, 63 & 79 FINRA securities licenses. He is also a Real Estate Broker, a volunteer SBA/SCORE instructor, and blogs at www.RickAndrade.com on issues important to middle market business owners. He can be reached at RJA@JanasCorp.com. This article is for informational purposes only and should not be considered in any way an offer to buy or sell a security. Securities are offered through JCC Advisors, Member FINRA/SIPC. 

Deciding? Better Make it Quick or Else

Parachute pic

We all make them. Dozens, maybe more each day, they are OUR “DECISIONS.” And they have become increasingly risky and important to all of us, but even more important if you’re a business leader, leading a global-reach company. And here’s why.

What were fewer key decisions needed to be successful decades ago are today a plentiful minefield. Think about the consequences of a failed merger, or acquisition. Not good. How about a failed product line launch? Yikes! And maybe the worst: A failed manufacturing plant expansion. Serious stuff, right?

As a CEO advisor, I hear about these exact concerns — of success vs failure — from business leaders who understand the consequences, and yet still find themselves compelled to make important decisions without even a basic framework to help.

For some it’s like playing Black Jack in Vegas, for others it’s “analysis paralysis.” Whichever way you think is better, in today’s globalization world, the widening gap between them suggests we find a useful middle-ground way to bridge the gap, and fast.

Think about this. One of the most fundamental things a human being does in the course of a lifetime is ‘choosing stuff.’ We love it. It seems nearly everything we do, every move we make is a Choice. Like a virus, it’s taken over. “Making Choices” is now so pervasive to have infected nearly every culture and business worldwide. And we can thank the internet, and perhaps anyone under 30 years old with a smart phone. Which for all the great things they bring to all of us; they also bring an addiction to the need for speed, and the pressure that comes with making ‘snap decisions’.

But how can you “take your time” so to speak, when time is not a 24/7 Text App, but rather a major decision? Start here:

Decision or Choice: Which is it…?

  • In 1180 BC (according to Homer) the Trojans woke up and spotted a large wooden Horse outside the gates of their fortified city…
  • In 1591 (according to Shakespeare) Romeo, thinks restful Juliet is dead, and drinks poison to join her…
  • In 1812 Emperor Bonaparte invades Russia, in winter…
  • In 1912 Captain John Smith leaves the bridge of the Titanic for a quick nap…
  • In 1914 Henry Ford announces a $5/day payday…
  • In 1945 President Truman drops the first Hydrogen bomb on a human city…
  • In 1970 Paul McCartney quits the Beatles…
  • In 1986 NASA launches the Space Shuttle Challenger any way…
  • In 2003 the US invades Iraq to rid it of WMDs…
  • In 2016 the Republican Party nominates Donald Trump for President…

Find any ones you like, or can specifically remember? There are literally 1000s of such events which over the course of time, the birth of the internet, and speed of social media developments that have to some extent seemingly conspired together to significantly blur the lines between Decision and Choice.

Isn’t making a Choice, though, the same as making a decision? Kinda, but there is a big distinction: A DECISION is something you “made” a long time ago, a contemplative analysis and review of the situation… whereas a Choice is the act of implementing the decision.

For example, we DECIDE to get married, but we chose our spouse. We decide to buy a new car, we choose the red one. We decide to grow our business, we choose where and how. Make sense? Choice is the Who, What, Where, When and How… while Decision is the WHY. So think about it… if you make a decision without objectively contemplating the “why,” you are unconsciously making a potentially hazardous ‘snap decision,’ putting “Choice” before “Decision,” and that can be seriously dangerous in business, or in your personal life.

A Framework for Making Better Decisions

In the last year, and in a recent article: …How to Make Better Decisions, I analyzed and discovered 6 Key Principles of Decision-Making that arrests the impulsive digital-age desire to make a fast choice and move on, which in-turn gives you back a sense of control. I call them “Decision Rings;” designed to bridge the gap between a too fast ‘Choice’ and a too slow ‘Decision.’

Decision Ring Image

As you can see, a Decision Ring is a simple 6-step circular process, and even if you never get past #1, ask the most fundamental question supporting any major decision; “Why the heck are we doing this?”  Because by asking “why” at the very beginning of any decision (or Choice), regardless of how much time you have to pull the trigger, if you can slow the contemporary urge to do so just long enough for a second guess – you just might take back what so many leaders in history wish they had.

So when you hear a friend or colleague say “you better make a quick decision or else,” draw a Decision Ring, and reflect for just a second or two: “Are we talking about a Capt. John Smith, or Paul McCartney?”

(c) Rick Andrade 2016