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Muir Musings on Multiple Shareholder Agreements

Posted by on 27 January 2020 | Comments

We recently met a company with four shareholders, each with 25% ownership.  There is no family relationship though they function well together, each responsible for a vital department within the firm.  When they purchased the company, a shareholder agreement included a provision calling for a shareholder wishing to retire to alert the others eighteen months before his planned retirement.  Upon receipt of the notice, the other three shareholders had to commit to stay with the business for another five years or make their retirement intentions known, if they wished to retire in less than five years. The agreement included other details for reaching resolution that I won’t get into here.

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Muir Musings on Add Backs

Posted by on 21 January 2020 | Comments

An important part of determining the expected value for a company in a sale is the normalization of earnings or “add backs”.  When we make presentations to buyers we include a page that makes adjustments for extraordinary expenses and expenses that were at the sole discretion of the business owner but not integral to the ongoing operations of the business.  This exercise is often misunderstood by business owners who see the process as an opportunity to add back everything they can think of to increase earnings.

comment(s) | Read the full post

Muir Musings on Family Welfare

Posted by on 13 January 2020 | Comments

If you are watching Succession on HBO (if you aren’t, YOU SHOULD BE), you know how dysfunctional the Roy family is.  Everyone is dependent on dad for money and affirmation.  Not good.  We sometimes see the real-life version in family owned businesses but without the cold calculation of Logan Roy.  

comment(s) | Read the full post

Muir Musing on "Why?"

Posted by on 6 January 2020 | Comments

At Beacon, we spend a substantial amount of time determining and discussing the value of a company.  Valuation can be a complex process involving multiple calculations and interpretations. Despite the formulas and calculations, often there is a simple question in need of an answer in an acquisition transaction which is “Why?” As in, Why Would a Buyer Want to Buy the Company? 

comment(s) | Read the full post

Grow Your Revenues

Posted by David Humphrey on 7 September 2017 | Comments

All profit starts as revenue. In real estate the key to value is Location, Location, Location. In business, the chant is Sales, Sales, Sales. Increasing revenues in the years leading up to sale is probably the greatest value enhancement technique. A business with growing revenues conveys so many positive aspects, including: 

comment(s) | Read the full post

One plus One can equal Three

Posted by David Humphrey on 17 August 2017 | Comments

Buying a competitor is a significant step, but can also be lucrative. Consider this simple example: Frank has a distribution business which, based on his profitability, would normally be worth $10,000,000. However he is only receiving offers in the $8,000,000 range due to customer concentration. One customer accounts for 30 percent of revenues making buyers nervous. His competitor, who is of similar size and profitability, also has a significant customer. One way to both lessen the customer concentration, and create value, is for Frank to buy the competitor for $8,000,000. A year later, Frank goes to sell his company once again. Now, since his revenues are twice as high, his largest customer is only 15 percent of revenues. The competitor’s largest customer, now part of Frank’s business, is only 15 percent as well. If the buyer perceives these customers as less risky since they are a “smaller” part of the business, Frank has immediately increased the value of his original business by $2,000,000 (25 percent) and the competitor’s business by $2,000,000 (another 25 percent) by reducing both customer concentration risks. The $8,000,000 purchase of the competitor increased Frank’s net worth by an additional $4,000,000, a 50 percent ROI (Return on Investment) with the acquisition.

comment(s) | Read the full post

Why are you selling?

Posted by David Humphrey on 27 July 2017 | Comments

Why are you selling? Some answers to this question scare buyers and can kill your deal. The buyer knows you know more about the business, customers and industry than they do. No matter how much due diligence they conduct this will always be true. So this question plays into the buyer’s fear that you are selling because the marketplace has changed and now is the peak time for you get out, as it is all downhill from here.

comment(s) | Read the full post

Time Kills Deals

Posted by David Humphrey on 6 June 2017 | Comments

Once a deal is reached with a buyer, there is typically a time period between the intent letter and actual closing, usually between 60 and 120 days depending on the industry and buyer. During this time the buyer conducts due diligence and the formal purchase documents are drafted. No matter how well you feel you are bonding with the buyer during this period, remember the deal is not done until documents are signed and the wire transfers of purchase money has crossed from their account to yours. Until these things happen, the deal is still in limbo and you are still in sales mode.

comment(s) | Read the full post

Legislation

Posted by Jeff Muir on 5 May 2017 | Comments

Business regulation is a fact of life.  Business owners need to have a good handle on how regulation and potential legislation affects their business’ future and what is coming down the pike. 

comment(s) | Read the full post

Unreported Cash

Posted by David Humphrey on 29 March 2017 | Comments

Being a business owner can provide an owner the opportunity to meet interesting people, many owners of other businesses as well. Some of these owners may become customers. From time to time, the owner then becomes a customer of his customer, an arrangement good for both businesses. However, when this occurs there is the temptation to trade products rather than follow normal billing practices and exchange of payment. This practice is typically not in an owner’s best interest for several reasons.

comment(s) | Read the full post

Muir Musings on Multiple Shareholder Agreements

Posted by on 27 January 2020 | Comments

We recently met a company with four shareholders, each with 25% ownership.  There is no family relationship though they function well together, each responsible for a vital department within the firm.  When they purchased the company, a shareholder agreement included a provision calling for a shareholder wishing to retire to alert the others eighteen months before his planned retirement.  Upon receipt of the notice, the other three shareholders had to commit to stay with the business for another five years or make their retirement intentions known, if they wished to retire in less than five years. The agreement included other details for reaching resolution that I won’t get into here.

comment(s) | Read the full post

Muir Musings on Add Backs

Posted by on 21 January 2020 | Comments

An important part of determining the expected value for a company in a sale is the normalization of earnings or “add backs”.  When we make presentations to buyers we include a page that makes adjustments for extraordinary expenses and expenses that were at the sole discretion of the business owner but not integral to the ongoing operations of the business.  This exercise is often misunderstood by business owners who see the process as an opportunity to add back everything they can think of to increase earnings.

comment(s) | Read the full post

Muir Musings on Family Welfare

Posted by on 13 January 2020 | Comments

If you are watching Succession on HBO (if you aren’t, YOU SHOULD BE), you know how dysfunctional the Roy family is.  Everyone is dependent on dad for money and affirmation.  Not good.  We sometimes see the real-life version in family owned businesses but without the cold calculation of Logan Roy.  

comment(s) | Read the full post

Muir Musing on "Why?"

Posted by on 6 January 2020 | Comments

At Beacon, we spend a substantial amount of time determining and discussing the value of a company.  Valuation can be a complex process involving multiple calculations and interpretations. Despite the formulas and calculations, often there is a simple question in need of an answer in an acquisition transaction which is “Why?” As in, Why Would a Buyer Want to Buy the Company? 

comment(s) | Read the full post

Grow Your Revenues

Posted by David Humphrey on 7 September 2017 | Comments

All profit starts as revenue. In real estate the key to value is Location, Location, Location. In business, the chant is Sales, Sales, Sales. Increasing revenues in the years leading up to sale is probably the greatest value enhancement technique. A business with growing revenues conveys so many positive aspects, including: 

comment(s) | Read the full post

One plus One can equal Three

Posted by David Humphrey on 17 August 2017 | Comments

Buying a competitor is a significant step, but can also be lucrative. Consider this simple example: Frank has a distribution business which, based on his profitability, would normally be worth $10,000,000. However he is only receiving offers in the $8,000,000 range due to customer concentration. One customer accounts for 30 percent of revenues making buyers nervous. His competitor, who is of similar size and profitability, also has a significant customer. One way to both lessen the customer concentration, and create value, is for Frank to buy the competitor for $8,000,000. A year later, Frank goes to sell his company once again. Now, since his revenues are twice as high, his largest customer is only 15 percent of revenues. The competitor’s largest customer, now part of Frank’s business, is only 15 percent as well. If the buyer perceives these customers as less risky since they are a “smaller” part of the business, Frank has immediately increased the value of his original business by $2,000,000 (25 percent) and the competitor’s business by $2,000,000 (another 25 percent) by reducing both customer concentration risks. The $8,000,000 purchase of the competitor increased Frank’s net worth by an additional $4,000,000, a 50 percent ROI (Return on Investment) with the acquisition.

comment(s) | Read the full post

Why are you selling?

Posted by David Humphrey on 27 July 2017 | Comments

Why are you selling? Some answers to this question scare buyers and can kill your deal. The buyer knows you know more about the business, customers and industry than they do. No matter how much due diligence they conduct this will always be true. So this question plays into the buyer’s fear that you are selling because the marketplace has changed and now is the peak time for you get out, as it is all downhill from here.

comment(s) | Read the full post

Time Kills Deals

Posted by David Humphrey on 6 June 2017 | Comments

Once a deal is reached with a buyer, there is typically a time period between the intent letter and actual closing, usually between 60 and 120 days depending on the industry and buyer. During this time the buyer conducts due diligence and the formal purchase documents are drafted. No matter how well you feel you are bonding with the buyer during this period, remember the deal is not done until documents are signed and the wire transfers of purchase money has crossed from their account to yours. Until these things happen, the deal is still in limbo and you are still in sales mode.

comment(s) | Read the full post

Legislation

Posted by Jeff Muir on 5 May 2017 | Comments

Business regulation is a fact of life.  Business owners need to have a good handle on how regulation and potential legislation affects their business’ future and what is coming down the pike. 

comment(s) | Read the full post

Unreported Cash

Posted by David Humphrey on 29 March 2017 | Comments

Being a business owner can provide an owner the opportunity to meet interesting people, many owners of other businesses as well. Some of these owners may become customers. From time to time, the owner then becomes a customer of his customer, an arrangement good for both businesses. However, when this occurs there is the temptation to trade products rather than follow normal billing practices and exchange of payment. This practice is typically not in an owner’s best interest for several reasons.

comment(s) | Read the full post