Buying/Selling a Business

Why some M&A's fail

Steve Sink is the founder and managing partner of Phoenix Affiliates Ltd. 

Recent surveys from companies that have participated in a merger or acquisition indicate that in most transactions the parties failed to achieve the objectives. Analyses for a successful or unsuccessful transaction indicate that the successful merger of two cultures is a key factor. Some specifics are: Phoenix logo only

1.  Leaders failing to recognize the importance of integrating the cultures of both companies.

2.  Focusing on the bottom-line vs. focusing on the people who will make it happen.

3.  Leaders' failure to involve and provide the authority to the key personnel from both companies for managing the integrating process.

4.  In general, too much time spent on assessing the culture vs. managing the culture.

5.  Owners' failure to communicate the priorities/goals to all employees.

6.  Loss of key personnel due to: Uncertainty about their future, lack of communication,  being left out of the transition process and no longer feeling important.

Naturally, there are other reasons for a failed M&A besides the integration of the two cultures.  But in all surveys this is always listed as the Number 1 reason for M&A’s failing to achieve their objectives.

Good luck!

Steve Sink


Professional and Confidential Client Representation

Business exit strategy

Steve Sink is the founder and managing partner of Phoenix Affiliates Ltd.  Logo only for phoenix

Prior to the sale and as part of a successful exit strategy from a family-owned business, the owner should have satisfactorily addressed these six critical questions.

  1. How can I provide for an equitable distribution of my estate among my children?
  2. Who should control and eventually own the family business?
  3. How can I use my business to fuel the growth of my estate outside of my business interests?
  4. How do I provide for my family’s income needs, especially those of my spouse and dependent children, after my death?
  5. How can I help preserve my assets from the claims of creditors during my lifetime and at my death?
  6. How can I minimize estate taxes?

An owner’s thoughtful answers to these questions will provide a smoother business transition for all parties involved and may well prevent/avoid a very difficult family situation.  Owners with questions about creating an estate plan prior to their business exit should contact an estate planning professional.

Happy Holidays!

Steve Sink CBI, M&AMI

Selling your business? Questions to ask a lawyer

Steve Sink is the founder and managing partner of Phoenix Affiliates Ltd.

Before you start to sell your business, consider that you might want to discuss the following points with an attorney:

1.    Are you truly ready to sell?

2.    How many business transactions has the attorney done?

3.    What is the chemistry between the two of you?

4.    What is the level of the negotiating skill?

5.    Do they understand the current market?

6.    Do they have a thorough understanding of your objectives and are in agreement?

7.    Will they work with your other advisers?

8.    Are they focused on getting a deal done?

9.    Have they provided you with an estimated cost to complete the transaction?

10.  Are you confident that they will be as competent, or more so, than the other party’s   attorney?

11.  Do they understand who they work for?


Good Luck,

Steve Sink, CBI, M&AMI

Getting your business ready for a sale

Steve Sink is the founder and managing partner of Phoenix Affiliates Ltd.

Selling a business can be one of the most important events in a business owner’s career.  Selling a business can also be a complex and mentally draining proposition with the potential to yield great rewards or financial disaster. Business owners often find themselves unprepared and unequipped to successfully manage the process. Preparing your business can mean the difference between a successful transaction or a costly transaction.

Preparing for the sale

Before your business goes on the market, here are some items to add to your bucket list:

Normalize your financials.

To present your financials in the most favorable light to potential buyers, you may want to consider switching from a cash method of accounting to an accrual method. Converting to this method can present buyers with a more appropriate financial image of your company.

Shift from an accelerated system of depreciation to one that shows depreciation spread over a longer period of time. Eliminate any expenses from your financial statements that could be deemed excessive by a potential buyer i.e. owner perks – expensive club memberships, relatives on payroll, etc.   

Clean, professionally audited statements suggest to buyers that your business is professionally and ethically run.

Ensure contracts and leases are up to date.

The terms and conditions of your customer and vendor contracts and equipment leases should be current. If your company assets include real estate, you might want to separate or sell the property (1031 exchange) before your business goes on the market because it has more favorable tax and liability implications. Also, normalize all lease and rents to fair market rates.

Reduce the risk for the potential loss of customers   

Survey your customers to determine issues which would cause them to leave you for a competitor, as well, as understanding why they do business with you. This report card will go a long way to address any perceived issues that the buyer may have and/or allow time to address any actual risks.  

Get the A/R line.

Get your receivables under control. Potential buyers will discount the sale price for late accounts.  

Clean your house- important guests are coming!

A neat, well-maintained appearance tells potential buyers that yours is a successful company. Now is also the time to give internal systems a tune-up and invest in technology and other upgrades.

Document your company’s policies and procedures.

Create policy and procedure manuals which detail the guidelines for managing your business.


The loss of employees is a deal killer.

Sale strategies

Meet with your professional advisors to insure that your sale process utilizes the most current tax strategies.  It is never what you sell it for-it is always what do I get to keep!

Start now

Ancient Secret:  It is always better to sell you business when you do not have to sell.

Good Selling

Steve Sink CBI, M&AMI

Lowering the value of your business

Steve Sink is the founder and managing partner of Phoenix Affiliates Ltd.

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Generally, when businesses are valued, the owner likes to see the highest value possible for the business. After all, it is human nature to desire the most wealth possible. Many times, valuations will be prepared to determine the price potential if the business is sold. Even when trying to obtain an amount for a spouse’s business during a divorce proceeding, a valuation will be completed with a view toward the highest value possible. Other situations exist where the client desires a low value; such situations include estate planning, divorce when the client will be paying out a sum, and when a potential buyer desires to purchase a business.

Legitimate avenues do exist however, to reduce the value of any given business when appropriate.  Discounts determined for lack of control and lack of marketability are legitimate and even common in valuations. In addition, as of late, discounts taken for a built-in gains tax potential are becoming increasingly common as more case support develops for the use of them.

Three Key Discounts    

(1) People generally prefer to have controlling power as opposed to being controlled. The lack of control discount or minority ownership discount in closely-held and small companies is given to reflect the detrimental effect of not having control of a business.  While a minority interest in a publicly traded company is not subject to a lack of control discount, in small companies, lack of control means the minority owner is subject to the whim of majority shareholders. Such detrimental decisions to minority shareholders can include: determination of management compensation, declaration of dividends and disbursements, setting the course of the business, and decisions to liquidate or sell business interests. Lack of control discounts can range from 35 to 50 percent, and even higher in some cases when compared to publicly traded stocks. Readers should be aware that the state of Florida has recently passed a law making the minority discount illegal whenever a company that has ten or fewer owners is valued.

(2) The lack of marketability discount applies to many small businesses as well.  Owners prefer to have assets that are more liquid as opposed to less liquid. It is with this preference that those businesses that can be bought and sold quickly are worth more.  Businesses that are hard to liquidate or are generally unmarketable are worth less than publicly traded companies. Because of this lack of marketability, certain businesses are given a discount to reflect the detriment of the ability to sell the company. Lack of marketability discounts can range in the area of 20 to 50 percent when compared to their publicly traded counterparts.

(3) Discounts for built-in gains tax are gaining more and more support. When C corporations are converted from taxable entities into flow-through entities, such as S corporations, LLC’s and the like, the potential for a tax liability known as “built-in gains” appears. Because of this potential, the company must plan and maneuver carefully around built-in gains issues. Nonetheless, from time to time, decisions are made on business bases that demand that built-in gains be recognized and taxes become due to the government. Many businesses, including businesses with deceased owners, run the risk of paying built-in gains tax. As such, taxpayers have successfully argued that such potential liability can be deducted from the value of a business under the theory that an investor, similarly situated, could purchase similar securities in a business without the built-in gains tax potential. It is because investors can invest elsewhere in order to avoid tax losses, theoretically, that the company with the built-in gain tax event potential is worth less than a company that does not have potential for a huge tax loss.


Some confusion results between the two types of discounts noted above when analysts arrive at discounts for control and marketability. Minority ownership interest discounts relate to the control the subject has in relation to the business. Marketability, on the other hand, deals with the potential to liquidate the company and how quickly and easily the company can be reduced to cash.

Discounts based on control and marketability have been around since the beginning of valuations. The built-in gains tax liability discount is new, and it has more estate tax implications, as well as gift tax consequences than other discounts.   

Good Selling,

Steve Sink  CBI, M&AMI

What's your business worth? It depends...

Steve Sink is the founder and managing partner of Phoenix Affiliates Ltd.

What is your company worth? The answer is a function of many factors, including historic and Phoenix logo onlyfuture financial performance, industry risks, market timing, method of sale and the nature of the buyer.

Value becomes an absolute only at the very instant a knowledgeable buyer under no compulsion to purchase, authorizes the wire transfer of funds to the bank account of a knowledgeable seller under no compulsion to sell. Otherwise, different people with different needs, resources and limitations will perceive value of the same asset in differing ways. As the business owner, you can use this knowledge to your benefit by specifically grooming the business to fit the probable requirements of the eventual new owners. History indicates that value runs from lowest multiples (sale to insiders) to the highest (sale to outsiders).

Sale Options include:

Sell to Employees

Sales to employees usually are at market value and require Seller financing because employees tend not to have enough for a down payment or the Seller feels guilty. The key is to have a number of key employees who are trained and capable of running the business.  

Sell to Relatives

These sales generally provide the Seller with the lowest sale price and the potential for the most problems. Sellers must be very careful to remove themselves from the sale process and future entangling obligations, while insuring that they will receive all payments due to them.

Put the Business on the Market

A sale to an outsider typically will be a negotiated transaction. The deal structure usually requires performance payments to ensure a smooth management transition and full transfer of customer and vendor loyalties. Other value drivers include a strong management team, disciplined internal and financial controls, and solid vendor and customer relationships. Patents and/or proprietary products or other barriers to entry are a big boost to value, as is the absence of customer concentration. Curiously, “curb appeal” and good housekeeping are also very important in making a solid first impression, as most corporate-trained buyers regard this as a quick indicator of sound management practice.

Sell but Stay

This type of deal allows for the transfer of ownership but the Seller stays.  In this situation, the Buyer wants the Seller to facilitate the transfer of ownership and success of the acquisition. This is a great exit strategy for the Seller who is not ready to retire but wants to secure their financial future. A typical buyer in this situation would be larger company seeking an add-on acquisition. In addition, the Seller will retain an equity position which should have a significant upside.

In Conclusion:

Value is driven by process, perception and facts. Sellers should determine what the goal is for their exit strategy (charity, gifting to family, sale to employees, maximize value, etc.) That, in turn, will point them to a category of buyers (insiders vs. outsiders), value and deal structuring expectations. Those buyers’ probable requirements will suggest how best to groom your company for sale. Your preparedness for sale and prevailing market conditions will dictate when you should undertake the process.

Good Selling

Steve Sink, CBI, M&AMI 

Buyer Beware!

Buyer Beware is a fundamental principle that governs business transactions.  It’s a reminder that the buyer of goods or services must exercise caution and diligence in investigating the purchase, and the seller is not responsible for ensuring the buyer’s satisfaction.

Of course, there are many circumstances in which “Buyer Beware” is not the only rule at play. For example, professionals are held to certain standards of performance within their professions. Real estate agents are required to discover and disclose to buyers material defects in a property they are representing. In transactions involving securities or franchises, the buyer is entitled to receive certain disclosures and information prior to making an investment. However, in the commercial context, it is generally the buyer’s responsibility to ask questions, obtain information and protect himself contractually.

It is simply impossible to discover every potential problem with a business through inspections and due diligence. A motivated seller will always be able to hide a problem. It is the professional responsibility a Business Broker has to not to participate in seller duplicity. At times, a Business Broker must rely on their instincts and advice caution when a seller or buyer just does not seem trustworthy.  Business Brokers must also, provide advice to their clients based on our experiences.


 Here some examples of situations which you should be prepared to handle:

1.  Investigate your Seller.  What is their reputation and personal integrity?

2.  Understand the documents.  What is that they say and do not say?

3.  Have qualified professional representation (Attorneys, CPA, CFP, Business Broker etc.)


Good Selling!


Steve Sink  CBI, M&AMI


Value Drivers When Selling a Company

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Whether you are considering a recapitalization, a management buy-in or buy-out, or a family transfer, there are key considerations that should be discussed and understood before any company is brought to market.

To identify the best buyer and maximize purchase price, the business owner should be able to articulate the value drivers for the company. Clearly articulating these points can help a Buyer see the value of your business.

Below are 5 key value drivers that must be discussed as early as possible in the process so that all parties are on the same page:

1. Customers

One of the most important value drivers to discuss is your customer. A clear understanding of how a business makes money and who its customers are is essential for any Buyer and deal negotiation.  

You also have to be able to speak to how you acquire customers. What is the profile and size of your customer base? How do you engage with them?  Having a legitimate sales organization, while not necessary for a successful deal, can help you demonstrate to an interested Buyer that you are working with regular, sustainable customers.

Lastly, you also have to be able to speak to how you lose customers. If your customers are able to abandon your business overnight with little to no switching costs, it will be a red flag. If you have customers that can leave next week without pain and heartburn, that’s not a good thing. While it is not an insurmountable challenge, the deeper entrenched your business is in the customer’s life and business, the better.

2. Industry & End Markets

In addition to your customers, it is imperative to be able to define the size of addressable market. There is no need for detailed reports, but you must have a sense of the number of potential customers and trends in that space. Is your industry growing or shrinking? Is there heavy regulation? These types of extra-company factors can help a Buyer make a decision.

Buyers are also concerned about businesses that are highly discretionary. For example, if your business offers a completely discretionary item, that means the purchase can be put off during downturns and economic uncertainty. That is a big risk in future cash flows and, unsurprisingly, a red flag for many Buyers. Similarly, if a business is very cyclical, it can be challenging for an investor. Most sophisticated Buyers will utilize leverage during an acquisition---leverage and cyclicality is a very risky combination.

To help assuage a Buyer’s concerns, you should demonstrate that your business tracks along with the general economy. If you can show solid financials that is a great sign that your business is not particularly subject to cyclicality or customer discretion.

3. Suppliers

The two questions you need to address are:

Are there any supplier concentrations? If your business is being influenced by your supplier because of their consolidation or control of the market, that is not a deal killer, but it is something that must be disclosed to the Buyer.  It is important to understand the costs and risks of switching suppliers.

Can a supplier go straight to your customer? If that is the case, it makes Buyers very nervous. Most Buyers want to see a fundamental, tangible reason why your business exists. If you are relying on opportunistic inefficiencies, there is a great deal of risk that your business will be squeezed out by larger competitors or those with vertical integration capabilities. You need to demonstrate that your firm will be around for a long time because it is addressing a clear need — and one that no one else can easily replicate.

4. Competition

As the interested investor gets the lay of the land, he will also need to know about the level and type of competition surrounding your company. If you claim there is no competition, Buyers will consider you to be naïve.   You will need to effectively be able to address the presence of any competitors and how you differ from them. What are the variables? Price? Service? Location?

You will need to explain why the customer is buying from you. Are they buying from your firm because of the salesperson? Or because of the right price? It may sound like a silly question, but it is fundamental to why a company exists.  Do you have pricing power? The more and better you can answer the question, the more value you can demonstrate in your business.

5. Management & Financials

Only after understanding the full environment in which you company exists will the investor begin to look into the company itself. Understanding the key stakeholders and management of the business is absolutely crucial to a successful deal.

When it comes to financials, the numbers will be what they will be. At this stage of the process, the Buyer is probably most interested in seeing how organized your business is. The numbers need to be reliable. Buyers do not want to be trapped in a situation where they have made a deal and in the due diligence process discovers that they were misled-DEAL BREAKER. The more confident a Buyer has in their ability to track the numbers, the more confident they will feel about the deal.

Good Luck

Steve Sink, CBI, M&AMI

Measuring the Risk Before You Buy

Logo only for phoenixThe price of a business is often tied directly to the amount of Risk that a buyer assigns to a business either subjectively or definitively. There does not appear to be a specific model for measuring risk, but the following can serve as a short checklist:

  • Product line diversification
  • Location
  • Leased or Owned
  • Customer concentration
  • Sales area
  • Health of customers
  • Health of the business sector
  • Supplier dependence
  • Exposure to foreign currency
  • Patents and Trademarks
  • Litigation
  • Management Depth
  • Quality and Stability of earnings
  • Operating capital needs
  • Seasonality
  • Capital expenditure requirements (annual and market driven)
  • Exposure to variable debt rates
  • Unique regulations and exposure
  • No Seller financing
  • Absence of Controls and procedures
  • Owner dependent
  • Lack of measurements
  • Pension exposure
  • EPA Issues
  • Lack of Noncompete agreements
  • Management and Financial Strength of Competition
  • Growth Opportunities
  • Commitments to employees
  • Tax issues
  • Allocation of the Sale Price

You will develop your own check list to help you measure your risk exposure.  Be sure to work with your CPA and attorney to create your own list.

Good Luck

Steve Sink 

Sad exit strategy

Steve Sink is the founder and managing partner of Phoenix Affiliates Ltd.

I was asked to meet with the owner of a forge company. The owner was a real gentleman and a very professional businessman.  He told me that he needed to sell his business within the next 3 to 4 months and wanted to know if I could help him.  

I reviewed the financials and pertinent information and found it to be quite profitable. So I asked him "What was the reason for the time frame"?

He told me that he had throat cancer and the doctors had given him that amount of time to live!  

We discussed the fact that a buyer would usually require the owner to stay on board for minimum transition period. And - the need to keep his condition confidential because if it got on the street, buyers would probably choose to wait out the situation. I told him that I would do the best that I could and took the listing.

Three months later, he had accepted an offer but passed away on his couch. Fortunately, he had kept his wife involved with the process and she made it through the closing process.

The sad part of the story is that the business did not sell for its true value vs. if the owner had taken the steps to do so. The good part is that the owner had done an excellent job of investing and the wife and children would not suffer financially.

The distressing fact to this story is that most owners have no exit strategy. 


Steve Sink

Certified Business Intermediary

Allocation of the sale price when buying or selling a business

Steve Sink is the founder and managing partner of Phoenix Affiliates Ltd.

Picture of Steve

Most businesses are made up of different types of assets, and those assets get different treatment for tax purposes. How those items are identified at the time of the sale/purchase can have a significant tax impact on both the buyer and the seller. A seller will, of course, want to designate items into classes that will yield a long-term capital gain on sale and thus provide the best tax result from the sale. Whereas the buyer will generally want to designate the purchased items into classes that provide the biggest up front write-offs.

The IRS generally does not care how the class allocations are made so long as both the buyer and the seller use consistent treatment and use GAAP as a guide. That is where IRS Form 8594 comes in. The form allocates the entire purchase/sale price of the business into the various classes of assets; both the buyer and the seller are required to file the form with their tax returns. It is also very important that allocations be spelled out in the sale/purchase agreement and the treatment must be consistent between the buyer and seller.

Generally, assets are divided into the seven categories very briefly described below:

> Cash and Bank Deposits
> Actively Traded Personal Property & Certificates of Deposit
> Debt Instruments
> Stock in Trade (Inventory)
> Furniture, Fixtures, Vehicles, etc.
> Intangibles (Including Covenant Not to Compete)
> Goodwill of a Going Concern
A seller would prefer to designate the major portion of the sales price to goodwill and minimize any allocation to furnishings and equipment. Why, you ask? Because goodwill is a capital asset, which for federal purposes will be taxed at a maximum rate of 15%, while the furnishings and equipment can be taxed as high as 35%. On the other hand, the buyer would prefer to have as much as possible designated as furnishings and equipment, since they can be expensed or written off over a short period of time (usually 5 or 7 years) as opposed to a 15-year amortized write-off of the goodwill. 

Whether you are the buyer or the seller, don’t leave the asset allocations to chance. Negotiate the allocation as part of the sales agreement. If you don’t, you could easily end up with inconsistent treatment and potential adjustments by the IRS. 

If you are anticipating a sale, please contact your CPA to assist you in structuring the transaction to your best benefit.

Feel free to contact me if you have questions.

Steve Sink

Certified Business Intermediary

Selling Your Business: For Sale by Owner?


The fact is when you decide to sell your business you must enlist other professionals. It will be expensive, but the investment you make will lead to a greater payoff. Consider the following when you think you can do it yourself:

·      Confidentiality: This is your number one concern.  You cannot put up a For Sale   sign.  You will need to screen and pre-qualify the buyers while controlling the confidentiality requirements and managing your business.

·         Emotions: When it comes to your little slice of the American pie, you’re bound to be emotional.

·         Judgment: There is no way you can view your business objectively, it is too much of you and you either under price or overprice it.

·         Time: Do you have enough time to run your business and sell it at the same time?  It will typically take one year and will eat-up much of your “free” time.

·         Special Knowledge, Skill and Experience:  Your skills are in running a business not in selling a business.

·         Adversarial Relationships:  You want more and the buyer wants to pay less. And-after the sale you will have to work the buyer.   Your representative needs to be the go-between and keep the deal moving forward.

All business owners have a dislike of paying professional fees. You will reluctantly engage their services only when it is absolutely critical. For most owners, the sale of their business will determine their future lifestyle.  You will need to have a team made up of a: Business Intermediary (the deal maker), an Attorney (legal protection) and your CPA (tax avoidance).

Remember: “The person who represents himself has a fool for a client”.

Good Selling!


Steve Sink, CBI, M&AMI

M&A Trends for 2014

Steve Sink is the founder and managing partner of Phoenix Affiliates Ltd.

Picture of Steve
The opportunity for strong M&A activity is set for 2014 and the coming years. The key drivers are:

1.  Many M&A funds (Private Equity Groups) are scheduled to exit from previous acquisitions, freeing up funds for new acquisitions. 
2.  In anticipation of higher interest rates, forward-looking M&A funds will be forced to focus on increasing the long-term value of their current holdings, if they are to achieve their sales goal.
3.  Low interest rates (cheap capital) currently support the ability to do deals now and the urgency to do deals before the increase in interest rates.
4.  Banking regulations have had a negative impact on M&A and thereby created a lending opportunity in the private sector for capital.
5. There is a growing confidence in forward earnings. This confidence is somewhat motivated by the anticipated change in the administration.
6.  Companies can recapitalize at very favorable terms and rates -- at much lower costs than an IPO.
7.  Higher confidence levels will lead to sale higher multiples.
8.  Government regulations are the main reason for creating uncertainty and the ability to make capital investments with confidence.

Steve Sink
Certified Business Intermediary
Merger and Acquisition Master Intermediary

A Seller’s Nightmare


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If you are thinking of selling or have not even considered it (yet) at some time you will receive an offer.  If the offer is good enough, you may decide to sell.   After all getting a great offer can be hard to turn down. 

Initially, everything will go well but things can get ugly when issues outside of your control take place:

1.  If it is a franchise, as part of the approval the buyer maybe required to make some very expensive upgrades and/or require an expensive and prolonged training period.

2.   The bank or franchisor may feel that the buyer is not financially qualified or has the required management expertise.

3.  The landlord may require a significant increase in rent.

4.  The bank requires the seller to provide some seller financing.

5.  The allocation of the sale price puts a tremendous tax burden on the seller.

6.  The buyer wants to work in the business before the closing.

7.  The buyer wants to keep the accounts receivable while the seller keeps the accounts payable.

8.   The seller is required to put a significant amount at closing in escrow for an extended period for various costs.

9.  A Phase 1 indicates that there is an environmental issue.

10.  The seller’s attorney is not experienced in business transactions and the buyer’s attorney is very experienced.

11.  The buyer is experienced and the seller is not.

Wishing you a successful 2014.

Steve Sink







Selling or buying a convenience store

Steve Sink is the founder and managing partner of Phoenix Affiliates Ltd.

There are two types of convenience stores.  There are those with gas and those without gas.   

While there are variations from this generalization - i.e. with a car wash, full liquor and those with a fast food franchise - in both cases this is a very difficult business to run successfully. Owners work very long hours, weekends, nights and holidays. Most of the employees are paid a minimum wage and the employee turnover is very high. 

In addition, much of the business is done on a cash basis making, tracking and managing cash a priority.

General sale guidelines are:

C-stores with gas:
Sale price is based strictly on reported sales
       -15 to 30% if annual sales plus the cost of the inventory
       -2 to 3 times SDE (Seller Discretionary Earnings) plus the cost of the inventory
       -2 to 5 times SDE when real estate is involved
Profit Margins: 15%

C-stores without gas
Sale price is based strictly on reported sales
The sale price is:
       -15 to 35% if annual sales plus the cost of the inventory
       -1.5 to 2 times SDE (Seller Discretionary Earnings) plus the cost of the inventory
       -2 to 5 times SDE when real estate is involved
Profit Margins: 1 to 3%

Merry Christmas!

Steve Sink



Why deals do not close

Steve Sink is the founder and managing partner of Phoenix Affiliates Ltd.

Any number of things can derail a deal to buy or sell a business. Here are a few of them.


·         Do not have a valid reason for selling

·         Just testing the waters.

·         Unrealistic sale price

·         Lack of honesty.

·         Lack of or poor records.

·         Do not understand the tax consequences or legal issues.

·         Will not provide seller financing



·         The fear of ownership is greater than the urge for ownership

·         Do not understand the buying process

·         Are not willing to do the work required of an owner

·         Influence of factors opposed to the purchase of a business

·         Lack of capital

·         No relative management expertise

·         Lack of experienced advisors



·         Due diligence discovery problems

·         Bank or SBA requirement for seller financing

·         Advisors with little or no experience in transactions

·         Seller cannot provide the required documents

·         Government regulations

·         Overly aggressive advice by advisors resulting in roadblocks


Steve Sink

Certified Business Intermediary

Merger and Acquisition Master Intermediary

How to find a buyer for your business

Steve Sink is the founder and managing partner of Phoenix Affiliates Ltd.

Disposing of your business is not as simple as planting a 'for sale' sign outside and waiting for potential buyers to line up. Just as with selling a house or any other major asset, a lot of work has to go into finding suitable buyers, and persuading them that your company is worth their time and attention.

Before you start to look for a buyer, you need to lay the groundwork for a possible sale. This means putting your financial and administrative records in order, ensuring that your cash-flow is healthy, and perhaps even spending a little money in order to improve your asset base and impress potential new owners.

If you don't spend the time to do this at the beginning of the sale process, you will undoubtedly waste a lot of energy trying to do it whilst buyers enquire, and may even lose a sale because you cannot answer basic questions. Don't short-change yourself in this foundational phase, because it will make <a href="">finding a buyer</a> much easier.

Once your business is in good shape for a purchase, you will need to decide whether to use a broker in order to sell it. The advantages to a broker are obvious, in that they take on most of the time-consuming search for a buyer themselves, and have existing networks to do so.

 They are also able to act much more confidentially than an individual owner working on their own. After all, it might not be good for the short-term health of your business to broadcast the fact that you want to sell. If you are comfortable with being open about your decision to sell, however, acting on your own might make more sense. It will certainly save you money.

Whether you are searching for a buyer yourself, or using a broker, the obvious place to start is by considering your existing competitors. If you are a successful part of the marketplace, similar companies will always consider a takeover.

After all, not only will they gain another outlet for their product or service, but they will also remove a competitor and increase their market share. Of course, you should only put out feelers to your competition when you are absolutely sure that you want to sell, and should only approach those companies whose management style and overall strategy would fit well with the existing culture of your business.

If you are not comfortable with the idea of selling to an existing competitor, you will need to search out new entrants to the market. This is best done by using your existing contacts, particularly by asking regular suppliers and trusted customers to put out the word in their own networks.

If you are happy to sift through a number of purely speculative offers, you can also put out a traditional advertisement in the trade press for your particular sector. If you prepare a succinct and well presented information pack to send out to any serious enquirer, you are likely soon to find a number of potential buyers getting in touch.

Just make sure that you perform your own due diligence on them, and check out the state of their finances. Don't waste your time on a buyer who cannot afford to pay!

 This article was contributed by, the market-leading directory of business opportunities and Steve Sink, Business Intermediary with Phoenix Affiliates.

8 steps to managing legal costs in a transaction

Steve Sink is the founder and managing partner of Phoenix Affiliates Ltd.

I am often asked by both buyers and sellers for suggestions to control their legal expenses when entering into a transaction. Here are a few suggestions:

1. Most attorneys charge by the hour, so prepare prior to any meeting or call.

2. Familiarize yourself with the documents which will be used.

3. There is no legal document(s) which can cover all contingencies.

4. Scan and email documents vs. mailing and delivery.

5. Consult with others who have experience in transactions (sellers, buyers, CPAs, bankers).

6. Ask for a quote.

7. Determine the experience and expertise level of the attorney who will be representing your interests.

8. Request that the transaction documents be drafted by the other party.

Good Luck!

Steve Sink


Succession Options

There are plenty of excuses owners use to put off the inevitable process of letting go. The most popular is ‘What would I do if I retired?’ Regardless, at some point in time a responsible decision must be made or it will be made without you.

The typical succession options are:

1. Merge with another business. This will often allow for a continued role in the newly formed business.

2. Sell to the employees or family member(s).

3. Sell the business.

4. Do not do anything with the distinct possibility that the value of the business will be determined by an auction.

Conscientious owners will take the time to consult with their team of professionals (CPA, attorney and CFP) to develop a plan which will allow them to: maximize their alternatives, minimize their tax issues and provide direction for the future success of their business.

Steve Sink, CBI, M&AMI

Alternatives to EBITDA Multiples

On a regular basis, we seem to be driven to want to know the current Earnings before interest, taxes, depreciation and amortization (EBITDA) “multiples” that apply to businesses in various sectors. We strive to find comparables that we can use to provide a prospective seller with an expectation range of price that he or she can anticipate for the sale of the business that they have worked a lifetime to create. We want them to believe that we will be able to find the right buyer, at the optimum price and that they will not be made to look foolish in the eyes of their peers... who are always parlaying the latest Industry scuttlebutt as to what Joe got for his business and why they think they deserve more. I would like to visit several aspects of price as there is much analysis to insure the optimum value. 

The first aspect to address when speaking to our potential sellers is the tax liability that is being created when the business is sold. If he or she sells assets, they will likely have recaptured depreciation – which is ordinary income. It can be taxed as high as 53% when combining various state and federal taxes. The allocation of purchase price could assist them here. If the purchase price allocation were to set out only the depreciated value for assets that they have taken depreciation, the seller may not have to endure the ordinary tax rate on recapture. This is highly unlikely, as the purchaser wishes to take the tax shelter on those assets acquired in the future. So, the current market value will likely be reflected in the allocation.

If the seller sells the shares of his firm, they can be assured of only paying the capital gains tax. This is a distinct tax benefit and will result in a materially larger after tax proceeds for the seller.

One must consider the advantage of using 1042 Election for the proceeds which will defer all taxes. This is the methodology, wherein you use an ESOP as the acquirer and as a result any and all proceeds that are reinvested in an eligible investment. The proceeds carry the old tax basis and are tax deferred. What an incredible win for the seller in that his net proceeds will likely have grown by 30% or more now that there is not a tax bite. Talk about blowing the EBITDA multiples!

Further consideration should be focused on dividing the sale into real estate and operating assets by using a 1031 Election. Exchanging the real estate for a like property, the seller can defer any recapture of depreciation and capital gains tax as they take this basis to the new property. The purchase price may be funneled into the real estate perhaps through the purchaser paying down or paying off mortgages, etc. on the real estate. A significant portion of the purchase price may now be tax deferred.

Conversely, one must be careful if acting for the seller that any employment agreements that are taken as a portion of the purchase price. Employment income is at the ordinary rate (as opposed to capital gain rate generally half that of ordinary). If we are acting as a buyers’ agent, we would certainly encourage as much of the purchase price in the form of employment agreements as all of this consideration is tax deductible. So, in effect it is almost halved as to net after tax cost. In this instance, we can also pay a very hefty EBITDA multiple (if that is important to the seller) as that portion of the purchase price that is allocated to the employment agreement is tax benefited by at least 30%.

Another significant contributing factor to the EBITDA multiple that can be achieved for a seller is the historical Compounded Annual Growth Rate (CAGR). Revenue, earnings, market share, etc. represent a significant value indicator that allows a purchaser to pay at the top of the range if for example, a 15% CAGR has been achieved over the past three to five years and the marketplace appears to accommodate that continued growth. Compare that against an entity that has demonstrated a 3 to 4% CAGR. Historical growth is a huge factor in determining value. However, it is really the purchaser’s belief that that growth rate can be sustained that truly drives the premium multiple. If the industry is growing, it is merely a matter of stepping on to that moving train and participating in the growth. If the industry is flat or contracting, then all growth has to come from taking business away from the competition...a much more challenging task. So the position of the business in the industry and the growth of the industry has a huge impact on the multiple that can be achieved.

Good Luck,

Steve Sink

Using discounted cash flow for valuations

Discounted Cash Flow Calculator - is a tool to...Discounted Cash Flow Calculator - is a tool to help estimate the present value of a stream of free cash flows discounted to the present. (Photo credit: Wikipedia)

If you used or will be using DCF (Discounted Cash Flow) in the valuation of a company you may want to consider a recent federal bankruptcy court decision court (N.D. Ill.): the “wide” and “striking” disparity between experts “lends credibility to the concept that the DCF method is subject to manipulation and should be validated by other approaches.” In particular, that by taking a discretionary approach to DCF, “a skilled practitioner can come up with just about any value he wants.”

The court cited experts who begin with the same cash projections but end with values nearly $8 million apart for a relatively small, family-owned company. In this case, the experts’ disagreement largely came down to how each calculated the weighted average cost of capital (WACC) thereby impacting: the debt-to-equity ratio, the equity risk premium (ERP), and the size premium—as well as the terminal value. Each expert cited various models and experts to defend their points but “each expert generally selected parameters that pushed his valuation in the direction he wanted to go,” the court says.

The court ruling essentially fell back on “real world” evidence at the time of the company’s acquisition to find that it was solvent, including its lack of debt, its substantial cash in excess of working capital, and its ability to keep current on accounts payable.

Good Luck

Steve Sink, CBI, M&AMI

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Not "To-Do's" when selling

An owner decides to retire and sell the business with $20 million of annual revenues. The company owns some locations and leases other locations utilizing the owners' entity. The business is profitable.

At the initial meeting the following items quickly became issues.

  1. Confidentiality: The owner had not planned to bring the CFO into his confidence by implementing a "stay" agreement. With all the ensuing financial updates and analysis, it would be impossible to expect the selling process to be achieved through due diligence without informing the financial offers of the imminent company sale.

    The logical potential buyers would be local competitors, which would sign a non-disclosure but there would be no assurance that there would not be a leak. The owner intended to talk to interested acquirers one at a time, thus prolonging the process and increasing the likelihood of a confidentiality leak.
  2. LOI (Letter of Intent): The LOI, which the Seller provided, was incomplete and did not require a significant retainer.  
  3. Transaction Attorney: The proposed Seller’s attorney had no experience in business transactions.
  4. Financial and Business Information: The financials and information regarding the business were incomplete and unprofessional making it difficult to get a true picture of the business, which will result in lower offers or no offer.
  5. Lawsuit: The owner wanted to bury a law suit in the fine print.


Many business owners do not appreciate either the complexities of doing a deal or appreciate the benefits of hiring a first-class team (Attorney, CPA and Intermediary) to conduct the sale process. The initial effort is well worth the back-end reward. Watch out for inexperienced dealmakers, they can ruin deals.

Enjoy the Holidays!

Steve Sink, CBI, M&AMI



Raising Capital for an Acquisition

When raising capital to acquire a business, or expand an existing business, you’ll need to view the investment from the perspective of the investor. To do so, you will need to know about investment risk vs. return, as every investment has risk. Federally insured certificates of deposits and interest-bearing bank savings accounts have risk.  Not necessarily principal or interest payment risk, but inflationary risk. If you are receiving 3% on your money in a two-year CD at the bank and you are in a combined state and federal marginal tax bracket of 33%, then you are netting out about 2% after tax. If inflation were to rise to 5%, you would actually be losing 3% on your money in the form of purchasing power.

Conversely, one may view lower-priced publicly traded stocks on the Over the Counter Bulletin Board as a high-risk, high-return investment. These investments generally have a higher principal risk but also have higher return potential. In general, risk and potential return go hand-in-hand. The higher the risk one takes on an investment the higher the potential return should be.

Any new company or venture will generally be viewed as very high risk by most savvy investors; therefore, a very high return potential must accompany that risk, but not too high, otherwise it becomes unbelievable if a "too good to be true" scenario. The trick to attracting capital for start-up and early-stage companies is using different deal structures to reduce the risk components of the securities being offered for the investor while maintaining the high return potential.

One attractive deal structure is to use a security such as a note, which is convertible to a participating preferred stock. This changes the risk return continuum for the benefit of the investor. A "marketable" deal structure allows for maximum upside while minimizing the downside... by utilizing creative financing structures buyers can create an attractive investment which can effectively compete for funding from individuals.

Simply think of yourself as an investor. How would you like to invest $100,000 in a new company or venture in the following manner: You purchase a $100,000 first mortgage note, with a 10% interest rate, and a first lien position on 100% of the assets of the company? Once the notes are ready to mature, you roll over the $100,000 into a participating-preferred stock being offered by the company that returns 10% in stated dividends and participates in 20% of the net profits of the company. By selecting this combination as your company deal structure, you would have reduced risk while maintaining a high potential return.

Good Luck,

Steve Sink


Burned out?

Burned out, tired, your business is no longer fun? We sell a lot of businesses because of this. But-don’t feel alone; at some time most business owners will have that “Burned Out” feeling. Many surrender and sell or close the business. And - some take control. If you are getting that feeling, you might want to consider the following to get you back on track:

1. Take some time away from the business (completely away!). You will return with a new perspective and energy.

2. Consult with some professionals about your business and the opportunities. Did you ever hear about the forest and the trees?

3. Learn to say “NO”.

4. Stop being the employee.

5. Get in shape.

6. Remember why you got in business.

7. Protect your time. When you dispense this asset, what is your return?

8. Ask for opinions. It can be easier than asking for help.

Good Luck!


Steve Sink



Transition teams

English: For Sale by Owner Sign svgEnglish: For Sale by Owner Sign svg (Photo credit: Wikipedia)

When you sold your home, you did not hesitate to use a real estate agent. Exiting your business can be much, much more involved (and financially more significant) than selling your home, and it can require sophisticated, experienced advisors to guide you through the process. Sophisticated business owners will assemble an experienced team to assist them. The team will have responsibilities to:

  • Identify and provide guidance to those areas that need to be corrected to meet the owner’s objectives (usually financial).
  • Help the owner determine if the objectives are attainable.
  • Help to keep the owner focused and on-track.
  • Develop a transition strategy for the owner, employees, customers and the business.

While a transition team can be most helpful, the owner has the ultimate responsibility for making it happen. Many an effort has failed because the owner will not change their habits.   

Good Luck.

Steve Sink



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Tax increases with the sale of a business

Many significant provisions of the Bush tax cuts are scheduled to expire at the end of 2012, which will result in significant changes to the tax laws. If Congress should fail to extend the cuts, income taxes, dividend taxes and capital gains taxes will all rise. The Long Term Capital Gains tax is the primary area that will affect most business owners thinking of selling their businesses. These affect the sale of stock.

There will no longer be a 15% tax bracket. It will rise to 20% as a result of the healthcare reform legislation. And it will rise an additional 3.8% via a Medicare tax beginning in 2013. This tax also will be added to dividend income taxes and even ordinary income taxes. In short, selling next year versus this year means the price received will need to be about 16% higher next year to net the seller the same amount as they would receive selling this year. How many owners will be able to increase the value of their business by that amount?

Some examples of possible scenarios:

Assumption: You net $1 million in the sale of your business and make less than $250,000 (AGI).

Option 1: If you sell the business before the end of 2012, the federal income taxes owed from the sale will be $150,000, you net $850,000.

Option 2: You hold out, but still sell for $1 million in 2013. Taxes will be 20% plus 3.8% or $238,000; $88,000 more in federal taxes ($238,000 vs. $150,000).

Option 3: You wait and capital gain taxes go up even more! Based on the government’s need for revenue this is a real possibility.

Plan well!

Steve Sink


Financing the business purchase

LoanLoan (Photo credit: Philip Taylor PT)

A buyer’s source of financing depends in part on the size of the business being purchased. The vast majority of businesses (and particularly the smaller businesses) are purchased with a significant portion of the purchase financed by the owner. The buyer, however, still must make a down payment and be sure that adequate working capital sources are available.

If the funds needed for the down payment are not readily available, the buyer must look for financing from an outside source. To grant such financing, an institutional lender is almost certain to require personal collateral for the loan as well as a wealth of financial and operating data of the business to be acquired. The most attractive types of personal collateral from the lender’s point of view are real estate, marketable securities and cash value of life insurance. In addition to personal collateral, it must also be demonstrated to the lender that the buyer is of good character, has a clear source of repayment, and has a good business plan.

Lenders for larger transactions may or may not require personal collateral from the purchaser; however, they will require a personal guarantee. Collateral for larger loans generally will consist of a first lien security interest in the tangible assets of the business, such as accounts receivable, inventory, equipment and real estate. The lender will set loan conditions and restrictions regarding certain activities of the business. In the case of insurance companies and venture capitalists, the lender may insist on an equity position in the business and a role in major management decisions. Insurance companies typically only participate in transactions above $10 million. Commercial finance companies make loans on much the same basis as banks. While the interest rate such companies charge is usually higher than that charged by the bank, they are often willing to take more risk.

It is rare for a privately-held business to be acquired without leveraging the business’s assets in some manner, pledging them as collateral for a loan made either by the owner of the business or an outside lender. The owner has a strong incentive to provide financing if he feels it is necessary to get the price he wants for the business and has confidence in the buyer. An outside lender must be convinced that the loan’s risk of failure is minimal and represents a profitable transaction. Institutional lenders are generally conservative and concentrate rate primarily on repayment. To obtain outside financing it is important to be well prepared and have information that a lender needs to make decision. This data should be submitted in the form of a loan proposal and should contain the following items:

1. Purpose of the loan

2. Amount required

3. Term desired

4. Source of repayment

5. Collateral available

6. History and nature of the business

7. Age, experience and education of management

8. Key advisors

9. Product

10. Market area and method of distribution

11. Major customers

12. Suppliers

13. Competition

14. Facilities

15. Employees and unions

16. Three years of business financial statements

17. Three years of business tax returns

18. Current personal financial statement

19. Pro forma business income statement, balance sheet and cash budget (for at least three years)

 In instances where obtaining bank financing on a stand-alone basis is not possible, an SBA guarantee or underwriting by a state or municipal economic development agency may be available.


Good Luck,

Steve Sink

Certified Business Intermediary

Merger and Acquistion Master Intermediary

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6 kinds of business buyers

SaleSale (Photo credit: Gerard Stolk (vers l'Ascension))

Buyers of businesses can generally be categorized as belonging to one of the following groups, and some buyers belong to more than one:

The Individual Buyer: This typically is an individual with substantial financial resources and with the type of background or experience necessary for operating a company. This buyer will typically seek a company that is profitable and will provide a return on their investment. If they lack in financial resources they will turn to family members or other resources for additional financing and rely on the Seller for some financing. These buyers will typically limit themselves to transactions of less than $1 million. Most of these buyers will come from unhappy or unsuccessful job situations.

The Strategic Buyer: This buyer is almost always a company trying to enter a new market, increase its market share, seek a strategic gain or to eliminate a competitor. These buyers can be in the same business or a competitor and will usually seek businesses with sales in excess of $20 million with a proprietary product and/or a unique market share with management willing to stay.

The Synergistic Buyer: Like the strategic buyer, this buyer is usually a company. They seek companies that, by joining the two together, will be worth more (i.e. 2+2=5). The benefit of this type of acquisition helps both companies be more competitive and profitable.

The Industry Buyer: This is often characterized as the “Buyer of Last resort”. The buyer is often a competitor, knows the industry and will not want to pay for the seller’s expertise.  Their interest is in reducing costs by combining the operations. They will typically pay only for the assets (usually not all of them and at a price below the market value). This buyer does not pay for goodwill or want to employ the Seller.

The Financial Buyer: This buyer is driven by the projected return on their investment.  They will have access to financing and will leverage it as much as possible.  Their sole purpose is to make the maximum amount of money with the least amount of their capital.

The Inside Buyer: These are family members or employees and will usually be the most difficult to deal with, require the largest amount of seller financing and often fail to make the payments to the seller. They often rely on the sympathy of the seller.

Steve Sink

Certified Business Intermediary

Merger and Acquisition Master Intermediary

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When to seek seller financing

Sellers hate it, but buyers are bound to ask themselves, “What is wrong with this business, when the seller will not bet on the future viability or their business and I am? I mean, other sellers are willing to provide seller financing?"

Here are some good reasons why seller financing is important:

  • Seller financing increases the chances for a sale.
  • The seller will usually get a much higher price.
  • The tax advantages are better than an all-cash purchase.
  • Seller financing tells the buyer that the seller believes in the future of the business.
  • Most banks will require some seller financing i.e. “If you don’t believe in the future of the business (and you know more about it than we will ever know), why should we believe in it”?

Lastly, Sellers will need to protect themselves in the same manner that a bank does when making a loan.  Some areas you may want to include would be:  Require good financials from all parties, run credit checks, use an attorney, get more than one party to guarantee payment, require quarterly financials, have a balloon payment option, keep title to the equipment, etc.

Feel free to contact me if I can be of assistance.

- Steve Sink




Thinking of Selling Your Business?

If you are thinking of selling your business here are some guidelines, based on the actual sales for various businesses:
* Restaurants (full service): 30 to 35% of reported sales plus inventory.
* Motorcycle dealerships:  10 to 12% of annual sales plus inventory.
* Car Wash-self-service:  4 times annual reported gross sales.
* Convenience Stores with Gas: 2.5 to 3 times owner’s earnings and benefits.
* Dental Practices:  60 to 65% of annual sales.
* Fitness Centers: 70 to 100% of annual sales plus inventory.
* Manufacturing-Metal Fabrication:  6 times EBITDA.
* Pizza:  Nonfrachise 35% of annual sales plus inventory.
* Pizza:  Franchise: 45 to 55% plus inventory.
* Retail:  30 to 35% of annual sales and market value for the inventory.

These are historical averages based on reported sales.  Individual sales will naturally vary based on location, earnings, seller financing and other issues.   Feel free to contact me if you would like additional information on you business.

Steve Sink
Certified Business Intermediary
Merger and Acquisition Master Intermediary

Transitioning the business to your employees

If a transitional sale to your employees is your exit strategy, you may want to consider some common issues that often occur:
* Owners will often over compensate employees, thereby selling the business or a portion of it below market value to employees.
* Employees may cash-in their ownership position for a handsome profit when offered fair market value for the company and the owner receives nothing for their generosity.
* Employees will demand a role in the management of the company. Often this will lead to management disputes, office politics, confusion and loss of direction.
* Will the company be forced to buy back a minority position at fair market value when an employee leaves? What will this loss of cash do to the value of the business for the remaining owners?
* Is it better to make employees earn an ownership position or allow them to buy it?
* Is your success as an owner making you feel guilty and triggering these possible events?

In short, there is no one set of answers to these questions. Taking care of your employees by helping them succeed so they can afford an enjoyable lifestyle and retire comfortably, should leave you with nothing to feel guilty about.

Steve Sink
Certified Business Intermediary
Merger and Acquisition Master Intermediary

Using an appraiser to value the business

So, you have found a buyer for your business but there is a significant difference in the offer and the asking price. One common method to handle this issue is for both parties to agree to use appraisers to determine the value of the business. If appraisers are going to be used to determine price in a valuation process, they need instruction regarding the specifics the parties to a buy-sell agreement are seeking. The agreement should define the issues/guidelines the appraiser(s) will use to provide the valuation.

1. Standard of value

2. Level of value

3. The “as of” date

4. Qualifications of appraisers

5. Funding mechanism

Standard of value

Will the pricing value be based on “fair market value” or “fair value” or some other standard? If the standard of value provision in a buy-sell agreement is not clear, appraisers may have to decide what the written words mean—a decision they may prefer not to make. Or the parties, whose interests have already diverged, will have to agree on a standard of value to provide instructions to the appraiser(s). Neither situation is ideal.

Level of value

The levels of value suggest a range of values, from the strategic controlling interest level of value of the enterprise as a whole, to the non-marketable minority interest level of value applicable to illiquid, minority interests. This lack of direction leads to some of the largest variations in valuation opinions by appraisers. These differences almost inevitably arise from absent or ambiguous specifications regarding the applicable level of value in particular agreements.  For example, is the company valued from the perspective of a non-marketable minority level or as a strategic acquisition?  Situations like this can and do happen and they are never pretty in their resolution, nor are the parties generally satisfied with the ultimate results.

The ‘as of’ date

The effective date of an appraisal is often called the “as of” date. It is the date the appraisers will use to assess the economic environment and the facts known about the company at that exact date on which they base their valuation.

Qualifications of appraisers

Buy-sell agreements are often silent regarding the qualifications of appraisers.  Parties to buy-sell agreements should consider appraiser qualifications when agreeing on an appraisal process. The logical requirements become apparent as parties begin to reflect on individual appraisers and appraisal firms. Therefore, the qualifications of appraisal firms should be specified based on their size, the scope of their business, and perhaps, on their specific industry expertise. 

The Funding Mechanism

The agreement should have a funding mechanism designed to ensure that the agreed-upon value will first, be affordable to the company (cash flow, financeable, viable assets etc.); and second, realizable by the seller. The funding mechanism is an essential business element of buy-sell agreements but only part of the due diligence process.

- Steve Sink

When the economy gets tough, tough get going

Running a business is hard enough without the added market convulsions, the collapse of the housing market and the general uncertainties. A forward looking business owner will most likely view this current climate as one of opportunity.  

- Prime locations are selling at discounted prices.

- Weak competition (market share) can be purchased for pennies on the dollar.

- The cost of money has not been this low in decades. 

- Often you can buy for less than you can rent.

Surviving in times like these is not for the faint of heart. However, by definition entrepreneurs are risk takers. They can see opportunities not in the balance sheets or market studies and are not distracted by the naysayers.  Some owners have survived by abandoning “business as usual”.  Many new boat dealers now focus on selling used boats, many of them repossessed by lenders, and they have discovered a huge offshore market for used boats. 

In short, when the economy goes in the tank, leaders retool and followers - well they just follow.

- Steve Sink

Early acquisition planning

So you finally made an acquisition.  Now what do you do?

In my experience, buyers and sellers have a “plan of sorts” to integrate the two businesses before closing. Yet they often fail to provide for any explicit connection between the deal-making process and the eventual integration of the two businesses. This disconnect may ultimately undermine an acquisition’s value and its perceived operational advantages. Both Buyer and Seller should require that there is a clear integration plan and designated manager who is responsible for managing the integration effort.

I know of no small business with a standing integration plan or team.  Owners seldom require that discussions on integration start early enough in the process. Those discussions are critical to avoid surprises later. The integration process has important implications for the due diligence, structuring of a deal and employee retention, all of which can look very different depending on whether the acquirer aims for full integration or plans to leave the target more or less untouched.

In conclusion, companies need to have a post deal learning process where employees can communicate key insights from the merger of the two companies, thereby enabling a future acquisition to be more successful. For example, they might hold workshops, analyzing each step in the acquisition process, documenting what has been learned and observed along the way, key lessons, the quality of the process and the business goals reached, employee reactions and document the observations for the future.

Good Luck

Steve Sink

Certified Business Intermediary

Merger and Acquisition Master Intermediary

The ESOP Option

President's Advisory Panel for Federal Tax ReformImage via Wikipedia

Over the last two decades, employee stock ownership plans (ESOPs) - spurred on by various tax incentives - have become widely established among both publicly-traded and closely-held companies. One of the unique features of ESOPs is their effectiveness as tools of corporate finance. However, their use as financing tools also increases their complexity.

Here are some thoughts for consideration.

What is an ESOP? At its core, an ESOP is merely a tax-qualified savings or retirement account plan (such as a profit sharing or 401(k) plan). However, unlike profit sharing or 401(k) plans that invest in mutual funds or other general investments, an ESOP is designed to invest primarily in the stock of the sponsoring employer. And although some special rules apply to ESOPs that do not apply to profit sharing plans, most rules (including eligibility and vesting rules) are the same.

What is a leveraged ESOP?  

One of the unique features of an ESOP is its ability to use borrowed money to purchase employer stock. When an ESOP borrows, it is referred to as a "leveraged ESOP." With the proceeds of a loan, a leveraged ESOP can purchase employer stock on the open market, from any selling shareholder(s) or from the employer itself. Thus, a leveraged ESOP can serve a number of corporate objectives, such as reducing the number of outstanding shares, buying out existing shareholders and financing corporate expansion.

How does a leveraged ESOP work?  

In a typical leveraged ESOP transaction, the ESOP will use the proceeds of a loan from a bank or other lender to purchase employer stock. The employer will guarantee the loan and agree to make contributions to the ESOP in order that the ESOP will have money with which to repay the loan. Because contributions to the ESOP (a tax-qualified retirement or savings plan) are tax-deductible, the employer achieves something that can only be done through an ESOP -- the ability to repay a loan using tax-deductible principal and interest. The amount that can be borrowed is limited by the amount of tax-deductible contributions needed each year to repay principal on the loan (generally, about 25 percent of the payroll of ESOP participants).

The stock that the ESOP purchases with the proceeds of the loan is held as collateral by the lender. Each year, as the loan is repaid, a prorated portion of the shares held as collateral will be released and allocated to accounts of individual plan participants, where they will be held until distributed and/or forfeited following the participants' termination of employment.

ESOP Loan Example

Assume an ESOP borrows $1 million to purchase 100,000 shares of employer stock, which the lending bank holds as collateral. Assume further that the company will make contributions to the ESOP sufficient for the ESOP to repay 10 percent of loan principal each year.

Each year, as 10 percent of the loan principal is repaid, 10 percent of the shares held as collateral will be released. Thus, after the first year, 10,000 shares will be released. The released shares are allocated to each participant's account prorated based on the compensation of such participant to the total of all participants' compensation.

Note that the value of the stock has no bearing on either the number of shares released from collateral or the number of released shares allocated to participants' accounts. Participants therefore receive the full benefit of any stock appreciation.

What other ESOP tax incentives are there?

In addition to enabling an employer to borrow using tax deductible principal and interest, subject to some restrictions, the following tax incentives further encourage ESOP borrowing:

  • Below-Market Rates: A lending bank is permitted to exclude from taxable income 50 percent of the interest it receives on qualifying ESOP debt, thus allowing an ESOP loan to be made at below-market rates.
  • Dividend Deduction: Although dividends are not normally deductible, they are when used to repay a qualifying ESOP loan. In effect, this allows dividends to be used to increase the amount of ESOP loan that can be repaid with tax-deductible dollars.
  • Tax-Deferral Opportunities for Selling Shareholders: A shareholder of a private company who sells his shares to an ESOP can defer recognition of gain on the sale by reinvesting the proceeds in publicly-traded U.S. companies. The seller's basis in the old shares is carried-over to the new shares. In effect, an ESOP provides not only a market for non-tradable shares, but also allows a private shareholder to convert an illiquid investment to one that is readily tradable. To qualify for the tax-deferral, the ESOP must hold at least 30 percent of the stock immediately following the sale and the selling stockholder must have held his shares for at least three years.

What are the drawbacks of an ESOP?

In exchange for the generous tax incentive afforded ESOPs, there are numerous requirements. Some of the more important requirements are the following:

  • Participant Voting Rights: In general, participants must be permitted to vote employer stock that is allocated to their ESOP accounts (regardless of whether or not vested). However, if the employer's stock is not publicly traded and the ESOP has a loan that does not qualify for the 50 percent interest income exclusion discussed above, then participants need only be given the right to vote on significant corporate matters (like a merger or recapitalization).
  • Put Option Requirements: In general, an ESOP can make distributions in either cash or stock, but participants have the right to demand stock. In the case of a closely-held company, participants must have the right to require the company to purchase their shares at fair market value. The "put" price may be paid in installments over not more than a five-year period. Stock of a closely-held company may also be subject to a right of first refusal requiring the shares to be sold to the ESOP or the company. It is important that a closely-held company budget for put option liabilities. If ESOP shares increase significantly in value, the put option requirement could become a drain on the company's cash flow.
  • Annual Stock Appraisals: If the employer's stock is not publicly-traded, the shares must be valued by an independent appraiser at least annually. The appraisal is critical for purposes of valuing distributions and put option rights. Annual appraisals can significantly increase the cost of maintaining an ESOP. Appraisals are also subject to scrutiny to ensure that they are performed independently and adequately reflect the fair market value of the stock. If the appraisal does not meet these standards, the fiduciaries of the ESOP may face liability.
  • Fiduciary Concerns: Fiduciaries of an ESOP are often officers and other key management personnel. As fiduciaries, they owe a special duty of care to the ESOP and its participants. However, they also owe a duty to the company. Because of the potential conflict of these roles, ESOP fiduciaries must be alert to possible conflicts of interest. Just as an independent appraisal of stock is required for ESOPs of closely-held companies, the use of independent fiduciaries and financial advisers to represent the ESOP may be appropriate in connection with transactions involving an ESOP.
  • The cost to maintain an ESOP can be significant.  ESOP’s require audited financial statements and most companies will contract with an independent fiduciary.
  • The annual capital requirements to support the ESOP can have a negative impact on growth.

Is an ESOP right for your company?

There is no quick and easy answer. Companies that establish ESOPs often do so for the following reasons:

  • to buy out shareholders who wish to retire, capitalize on all or some of his or its shares, or otherwise no longer own the Company
  • to reward employees who have contributed to the success of the Company
  • to improve productivity and reduce turnover by giving employees a stake in the business
  • to provide employees with a tax-favored retirement savings plan
  • to provide a tax-favored means of corporate finance

Implementation of an ESOP is a significant event requiring careful planning and analysis utilizing qualified financial and legal advisors. While many of the objectives enumerated above may be achieved in a number of ways, an ESOP is a unique vehicle that delivers on all of them.

- Steve Sink

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Managing to Keep Managing

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Failure to change is the number one reason that businesses fail.

I work with many entrepreneurs in the early stages of building their businesses. They are going the proverbial 100 miles an hour and experiencing most of the classic growing pains: working capital is tight, they work too many hours, they are going different directions at once trying to devote the time needed to the various facets of their business. 

One of the suggestions I make is for the owner to bring on a consultant to help him take his company to the next level by prioritizing obligations, adding systemization and positioning the business to be able to handle the challenges and changes required to grow.

The first reaction is almost always, “I don’t need to hire a consultant, all they do is ask me for my watch and tell me what time it is. I know how to run my business better than they will. I’m short on cash and already have too much on my plate.”  

I then suggest to the owner that the more successful an owner is, the more likely they will seek outside opinions and consultants do provide a tremendous benefit. A vivid example might be professional athletes hiring coaches to make them better. 

Hiring a professional helps keep you on top of your game and helps take you to the next level of your management capability. It’s so easy to get set in our ways, think that we know it all and be resistant to change. Like it or not, change is going to occur. So you must be ready and willing to prepare yourself for the journey.   

Epilogue:  I've seen a number of entrepreneurs who were too proud to ask for help and now the bank is managing their business.

- Steve Sink

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Putting a Value on a New Company

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Occasionally, I come across a new company that has been successful, and the owners would like to sell. They would like to set a selling price. And without a great deal of history, but with a lot of promise, what should the selling price be? 

The truth is that this is usually an “art”. To place a value on a business that has not been tested is virtually impossible. A positive bottom-line on new businesses is rarely found and may even not be a positive sign. Given these parameters, the valuation process becomes a subjective process for the both the Seller and the Buyer. And it will vary greatly depending upon their expertise, their tolerance for risk, their experience, thier perception of management and the opportunity.

Either party may use discounted cash flow to arrive at a value, but growth projections can cause this number to have wide variations. Therefore, this method is rarely used.

A guide that a Seller might use would be to follow the model for valuation which an experienced Buyer might use: 

1.  Assemble a team of professional advisors.

2.  Determining a value for the tangible and intangible assets

3.  Review the customer base and their growth projections.

4.  Check for contracts. 

5.  A review the competition, the market and entry barriers

6.  Evaluation of the management.

The sum of these factors will assist the Seller in determining a valuation and provide a        credible foundation for negotiations with any potential Buyer.

Good luck.

- Steve Sink

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Possible Tax Consequences of Seller Financing

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You have sold your business and elected to do some seller financing to maximize the sale price. But, before you start to spend those payments, be sure to check with your accountant. In general, the gain or profit from the sale of property can be reported under the “installment method” of accounting for tax purposes.

This rule was put in place under the theory of tax law that taxpayers should not be required to pay taxes when they have not received enough cash to cover the tax bill. It started out as a good rule, but Congress has put so many restrictions on the use of this rule that, without careful analysis, you can face a bigger tax bill than any amount of cash you’ve received!

Some of the most common exceptions are:

1) Depreciation Recapture: You’ve been claiming accelerated depreciation on your business assets and you are now disposing of the business before the assets are fully depreciated. Now you have to go back and “recapture” any excess depreciation claimed over the straight-line method of depreciation. This “recapture” amount must be taxed in the year of sale and is not allowed in installment sale calculations. Again, for the sale of a partnership interest, you must “look through” to the assets of the partnership, and this rule could apply.

2) Sale of Publicly Traded Property: Congress determined that if you are selling assets that are readily traded in a market (i.e., an established securities market), the asset is liquid enough that you can sell it in order to pay tax on the gain. Therefore, we have this exception to the installment sales rule.

3) Sale of Inventory: The term “installment sale” does not include disposition of personal property that is included as inventory of a taxpayer. This includes the sale of a partnership interest to the extent that the sale is attributable to the partnership’s inventory.

4) Sale of Depreciable Property to Related Persons: Selling your business to a relative? Don’t expect installment sale treatment to apply to the depreciable assets. Note that this only applies to depreciable assets – if your building is included in the sale, you can still get installment sale treatment on the land under the building. “Related persons” includes selling any property to another company in which you, or a related person, owns 50 percent or more of the stock.

In short, if you have lots of inventory or depreciable equipment, you may find that the installment sale rules are not going to help you come tax time. Therefore, be sure to have your CPA review all terms before entering into an agreement to sell.

Good selling.

-Steve Sink

Financing the Deal

 A buyer’s source of financing depends in part on the price of the business being purchased. The vast majority of smaller businesses (less than $2million) are purchased with a significant portion of the purchase financed by the owner. The buyer, however, still must make a down payment and be sure that adequate working capital sources are available.

If the funds needed for the down payment are not readily available, the buyer must look for financing from an outside source. To grant such financing, an institutional lender is almost certain to require personal collateral for the loan as well as a wealth of financial and operating data of the business to be acquired. The most attractive types of personal collateral from the lender’s point of view are real estate, marketable securities and cash value of life insurance. In addition to personal collateral, it must also be demonstrated to the lender that the buyer is of good character, has a clear source of repayment, and has a good business plan.

It is rare for a privately-held business to be acquired without leveraging the business’s assets in some manner, pledging them as collateral for a loan made either by the owner of the business or an outside lender. The owner has a strong incentive to provide financing if he feels it is necessary to get the price he wants for the business and has confidence in the buyer. An outside lender must be convinced that the loan’s risk of failure is minimal and represents a profitable transaction.  To obtain outside financing it is important to be well prepared and have information that a lender needs to make decision. Here is a typical check list of the information you should be prepared to submit to the lender.

1.      Purpose of the loan

2.      Amount required

3.      Term desired

4.      Source of repayment

5.      Collateral available

6.      History and nature of the business

7.      Age, experience and education of management

8.      Key advisors

9.      Product

10.  Market area and method of distribution

11.  Major customers

12.  Suppliers

13.  Competition

14.  Facilities

15.  Employees and unions

16.  Three years of business financial statements

17.  Three years of business tax returns

18.  Current personal financial statement

19.  Pro forma business income statement, balance sheet and cash budget (for at least three years and the first year by month)

Good Luck,


Steve Sink

Certified Business Intermediary

Merger and Acquisition Master Intermediary

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Leaving the Partnereship

Many business owners enter into a partnership without a good buy/sell agreement in place.  Often this puts a heavy burden on the buyers, sellers and heirs.   The problems with most agreements are:  1. Failure to define the terms of the exit, 2. What criteria will trigger the agreement?  3. How the company is valued today and in the future, 4. Defining the terms of transferring the business to the new owner(s), 5.  Will the partners honor the agreement and the penalty if they do not?  6. The valuation terms for a partner who leaves voluntarily or is terminated, 7.  What happens when the company has other obligations that do not allow it to meet the terms of the buy/sell agreement?   8. Failure to use a professional in drafting the document.

Personalities make it difficult to define the perfect buy/sell agreement.  However, some elements for a buy/sell agreement should include:
1.  Establish the valuation formula and terms before the deal.
2.  Insure that there is a clear path for the separation.
3.  Define the criteria that will be used in determining valuation, surviving partner, exiting, deal structure, and a non-compete agreement.
4.  When the parties cannot agree, who will arbitrate and what authority will they have?

Good Luck
Steve Sink
Certified Business Intermediary
Merger and Acquisition Master Intermediary

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