Author Archive

It‘s Time to Restart. Begin the Fight to Win the Future

Written by Gene Wright. Posted in COVID 19 Get Help for Small Businesses

The PPP and EIDL loan programs are not even a month old and yet somehow it is hard to remember our lives before it. During that time we have banded together, seen Congress initiate the first PPP program fully subscribed in a week, introduce a second PPP program that was much more friendly to smaller business owners, sought fairness from banks, and seen a great deal of press highlighting the plight of small businesses. There have been successes and failures, but the bedrock of our small business community is still hanging tough.  

A month in, almost everything about our lives has changed in some way because of COVID-19. As business owners tentatively feel their way to reopening, resolving to win the fight and reclaim their future is real.

The fight phase is critical because it creates the opportunity to win the future. It will be protracted and expensive and will vary greatly by community and segment. The adequacy of economic policy will determine how fast we can recover to normalcy and avoid a future lockdown. No one knows how long the crisis will last, but already we are seeing innovation in small business owners beginning to fight back.

I don’t see any way business activity returns to pre-virus level before the public regains it confidence to venture out again, but we must begin the fight now. Create a mindset of sales growth based on what your customers need now. Start or expand your online presence and begin thinking about potential sources of advantage you can build on during the fight.

How will you transform your business to win the fight and the future?

Sell in May and Go Away?

Written by Gene Wright. Posted in Selling a Business

An old Wall Street saying suggests investors reduce their exposure to stocks they own in May and return to the market in the fall. But what about small business owners who have been impacted by the COVID-19 virus? Many are still closed and not really sure how quickly customers will return. Higher operating costs, employee safety, and supply chain complexities await the brave new normal.

Yet some Baby Boomers remember the impact of the last financial crisis and how long it took the economy to recover and are fearful of waiting another two years to get back to even. For owners in the construction, manufacturing and healthcare businesses, recovery will be sooner than others. Some small restaurants, bars and independent gym owners in urban areas may never reopen and landlords will be hard pressed to find brave new entrepreneurs to replace them.  

During the past few weeks, I have talked with several owners and most all are either weighing the pros and cons of when and how to start again or considering closing their own business. Here is my advice.

If you are a business owner thinking about an asset sale, determine the value of your assets, review your lease carefully and be realistic about what your business is worth when considering a decision to sell. On the other hand, if you own a profitable cash flowing business and believe recovery will be swift, now may be a good time to find out what your business value is in today’s environment . There’s little doubt that the range of value has been impacted for main street businesses, but there are incentives available from the SBA for qualified buyers that can help minimize the downside impact on price.

In either scenario, talk with an experienced business broker to help you determine your best course of action. We are here to help you.

Is the Boomer Cowboy Culture Over for Small Business Owners?

Written by Gene Wright. Posted in COVID 19 Get Help for Small Businesses

Baby boomers are the second largest population of small business or franchise owners and make up 41% of small business or franchise owners. 10,000 of us turn 65 every day. Before COVID-19, most ran profitable businesses. In our DNA is an entrepreneurial spirit, a sorely needed attribute these days.

Boomer owners are also fiercely independent and none of us like to be told how to run our business. Larger competitors are defining new rules for customer service; reduced operating hours, contactless delivery/pickup and limiting customer counts instore. There’s new safety measures  for employees and a visible emphasis on sanitation instore. Who knows how the 6 foot rule will work but the new standard is customer safety and a renewed confidence in your brand.

Reopening successfully may have as much risk as staying closed, whether or not you have our governor’s say-so or SBA funding. Opening will mean lower revenues initially and increased operating costs as customer expectations are met by larger competitors. Operating costs will rise to comply with customer and employee safety. Taxes and insurance costs certainly rise sooner or later.

No one knows how long this crisis will last, but It is time to start thinking about the new normal. Your customers are visiting your websites to see if they can do business online and whether or not you have changed your messaging to embrace to the new normal.

Neither you nor the governor are in charge, your customer is. Time to adapt and overcome.

$6.7B in SBA PPP & EIDL Funding Approved in Georgia

Written by Gene Wright. Posted in COVID 19 Get Help for Small Businesses

Last week we were all in a state of frenzy helping clients try and understand the rules of engagement from banks and the SBA to get loan applications submitted while insisting that small business owners get applications in quickly.

As we thought, demand for funding through the PPP program has been huge. As of April 13, just 10 days after the program opened, the SBA reported that over $247 billon has approved more than 71% of the total funding for the program.

Although more than $247 billion in funding has been approved, many owners have yet to see a penny. The SBA had indicated lenders have to fund an approved loan within 10 days, but with so many applications in the pipeline, we understand why many loans haven’t funded yet.

Georgia has seen 29,423 loans approved through April 13 worth $6.7 billion, or about 2.7% of the total allocation. The leading sectors getting funding so far are construction, and manufacturing. Further, PPP applications for self-employed workers opened on April 13, which will add to loan processing time.

It is unclear if Congress will make additional funding available given the continuing political dysfunction in Washington. If you haven’t applied yet, get it done quickly!

Small Business Winners. Losers and “Reformulators” after A. C. (COVID -19)

Written by Gene Wright. Posted in COVID 19 Get Help for Small Businesses

I’m a baby boomer business broker trapped at home and trying to figure out what to do to help small business owners impacted by the coronavirus stay alive. With all small businesses not classified as urgent now closed in metro Atlanta, we’re all together hoping we can flatten the curve as soon as possible. Business owners I’ve talked to in the home health care and commercial cleaning businesses are worried about fulfilling unprecedented demand and keeping their employees safe while an owner of a small medical clinic is struggling to get testing kits to keep their clinic open. Everyone has seen their business change in ways none of us could have imagined six weeks ago. Lost revenue can never be recovered. As I think about what happens after what happens next, there will be winners, losers and “reformulators”, companies who adapt to change and survive. I believe we’re already reached a tipping point that may fundamentally change the way many business owners will operate A.C. (after COVID-19). Larger employers utilizing video conferencing with employees working from home may find that all that office space may not be needed later and impact the commercial real estate market A.C. Restauranteurs are learning how to start a customer pickup business and the importance of mobile marketing. Local retailers are learning how to operate with reduced hours while turning selling space into warehouse space to pick orders for customers. Small businesses can pivot much faster and are more entrepreneurial than larger ones, and owners who can figure out ways to stay in business will become even stronger A.C. Some won’t survive. With 10,000 boomers turning 65 every day, the small business landscape will change rapidly. Those business owners and franchisees who have a job (solopreneurs) versus a business are at risk because they are undercapitalized and won’t be able to secure financing because they simply can’t repay the debt and won’t get loans approved. Others will fail because they are debt averse and don’t want to pledge homes as collateral if their business eventually fails. I’m convinced help will arrive from our state and federal government, but when? Who will get the help? Will it come in time to help save a large number of small businesses in Atlanta? Delays and confusion will be the order of the day as they too become overwhelmed, frustrated and exhausted as they try to help. If you’re a small business owner and would like to share with us what you’re doing to stay alive, send them to me and I’ll pass them along to others in the same boat.

Owner’s Quandary- Sell Your Business or Stay in Business?

Written by Gene Wright. Posted in COVID 19 Get Help for Small Businesses

Small business owners in Georgia have seen life as they know it change in ways they could have never imagined just six weeks ago. Even you own an “essential” business it’s far from business as usual. Employee work dilemmas, reduced operating hours and operating cash are top of mind for businesses still open. Others forced to close by state or municipal order for an undetermined time are in serious peril with no end in sight. Governor Kemp declared the state an economic disaster area in all counties in Georgia just last week, enabling the SBA to make available interim relief rough its Economic Injury Disaster Loan Declaration. Congress is working on additional economic assistance as well. Help is on the way.

But will help arrive in time? The current timeline for loan processing by the SBA is already 2-3 weeks, and the process for approval while easier than before is no walk though the park. You will need to provide personal and business historical financial information, authorization to past years’ tax returns and a good business case on your business impact thus far. And if you don’t have enough profitability to service new debt, its not clear you’ll get loan approval. We need additional financial options quickly.

For businesses operating profitably before the virus, falling revenue forecasts and no end in sight to COVID 19 will make dramatic changes necessary. Managing cash flow, employee safety and retention are prerequisites to survival until help arrives.

I believe we’ve already hit a tipping point in the fundamental way small businesses will operate going forward. Innovative use of video and telephony are keeping owners in touch with customers, and reduced hours could remain after the virus fades. We’re here to help you. We’re constantly looking for the BEST sources of operating capital for our clients while helping them find ways to reduce costs and optimize revenues.

If you are in need of help. please give us a call at 404-908-5561 or email me at ggwright@nstarconsulting.biz.

What’s the Atlanta Area Small Business Market Like?

Written by Gene Wright. Posted in Research & Analysis

We get a lot of questions these days about the Atlanta area small business market. What’s the seller’s market like? Who’s buying? What do the credit markets look like? In short, the market’s demand is higher than supply of fundamentally good small businesses being offered for sale based on our discussions with buyers and sellers of local area businesses.

What’s driving this interest? In short, there’s more money looking for businesses to buy. From first time buyers tired of working for someone else to private equity groups that recognize the lower risk of acquiring established businesses versus startups starting from scratch, there’s more money chasing deals than there are good businesses to buy.

However, business-valuation models are becoming more complex. Establishing a value for a small business is an increasingly difficult exercise; comparable data are not readily available for small operators. The value range between businesses in the same sector may vary significantly due to internal and external risk factors. Given multiple methodologies available to value businesses, the importance of retaining a experienced business broker with local market knowledge and access to industry research to price businesses more accurately is very important.

If you are an owner and are starting to think of selling, are you ready? Is your business ready to sell? It should come as no surprise that, in order to get the highest valuation, you have to prepare your business to warrant it.

Working with us to help what your business is worth is a worthwhile exercise whether or not you decide to sell it this year, particularly in view of the market’s strength. Give us a call, we’re here to help.

Valuing a Business Using Seller’s Discretionary Earnings (SDE)

Written by Gene Wright. Posted in Financial Modeling

How Small Businesses Are Valued Based on Seller’s Discretionary Earnings (SDE)

Public companies and middle market businesses are valued as a multiple of EBITDA – Earnings Before Interest, Taxes, Depreciation and Amortization.  However, smaller businesses are valued as a multiple of Seller’s Discretionary Earnings (SDE), which can be defined as EBITDA + Owner’s Compensation.  Therefore, SDE is typically the net income (or net loss) on the company tax return + interest expense + depreciation expense + amortization expense + the current owner’s salary + owner perks.

Because it is the foundation of business valuation for small businesses, SDE is an important concept to understand.   SDE is typically the net income (or net loss) on the company tax return + interest expense + depreciation expense + amortization expense + the current owner’s salary + owner perks. 

Seller’s Discretionary Earnings Normalization

To arrive at SDE, the seller’s financial statements are “normalized” (alternate terminology includes: “recast” or “stabilized”).  The typical “SDE Normalization” presents the seller’s regular income statement and then shows each normalizing adjustment (with an explanation) to arrive at the normalized SDE.

Seller’s Discretionary Earnings adjustments resulting from personal and/or discretionary expenditures

In addition to the adjustments of EBITDA + Owner’s Salary, other adjustments may be necessary.  For instance, it’s no surprise that many small business owners run a lot of personal expenses through the business that have nothing to with operating the business.  If properly documented, those personal and/or discretionary expenditures may be added back to SDE.

Other types of Seller’s Discretionary Earnings adjustments

  • Many small business owners personally own the real estate the business occupies.  If the business is overpaying or underpaying facility rent, the amount needs to be adjusted up or down to reflect the rent a prospective buyer of the business would expect to pay.
  • Occasionally there are non-recurring expenses, such as an extraordinary legal bill due to a lawsuit, that may be added back to cash flow.
  • There can also be non-recurring income (i.e. sale of a fixed asset at a large gain).
  • Some businesses employ multiple family members who may receive above-market compensation.  The above-market portion of their salaries can be added back to the extent there is sufficient expense remaining to enable a prospective buyer to replace those family members at a competitive market rate (or adjust their salaries if they stay on board).
  • These are some of the common adjustments, but there may be justification for others.

Small business valuations are based on multiples of Seller’s Discretionary Earnings

When it comes to valuing a small business (under $3,000,000 in value), SDE is the common denominator to which a multiple is then applied.

The multiples are driven by a range of financial factors including: 1) financing formulas; 2) the buyer’s need to have a reasonable return on investment after paying debt service on the acquisition; and 3) the buyer’s need to receive reasonable compensation for the time and effort required to run the newly acquired business.  There are numerous other factors, including the industry, that can also affect the selection of an appropriate multiple.

But one of the primary factors is the level of SDE itself.  For financial reasons, buyers are willing to pay a higher multiple for higher SDE.  The following is representative of the range of multiples at various “cash flow” (SDE) levels:

    SDE        Multiple            Business Value
$50,000 1.0 – 1.25 $50,000 – $62,500
$75,000 1.1 – 1.8 $82,500 – $135,000
$100,000 2.0 – 2.7 $200,000 – $270,000
$200,000 2.5 – 3.0 $500,000 – $600,000
$500,000 3.0 – 4.0 $1,500,000 – $2,000,000
$1,000,000 3.25 – 4.25  $3,250,000 – $4,250,000

CAUTION:  The above multiples do not apply to all industries.  For instance, the construction industry would typically have lower multiples than displayed above.

Seller’s Discretionary Earnings is a very important concept to understand

Because it is the foundation of business valuation for small businesses, Seller’s Discretionary Earnings (SDE) is an important concept to understand.  Having an SDE below $100,000 is a major obstacle to a successful sale of a business (but not impossible).

Why Selling a Business Takes Time

Written by Gene Wright. Posted in Selling a Business

Selling a business is a complex proposition. There are dozens of considerations, tangible and intangible, that must be considered when evaluating whether a transaction is a good fit for a buyer. Due diligenceis the process by which buyers attempt to dig into all these factors before signing off on a deal.  

In a sense, due diligence begins as soon as a buyer becomes aware of a potential deal. Every subsequent interaction — from the first Google search of the company name to the initial phone call with the business broker to the first meeting with company executives — informs whether a buyer decides to move forward with a deal.

Due diligence usually focuses on a few main areas (though the process will vary depending on the industry, the size of the business, and the buyer). These include: 

  • Business/operations: How sustainable is your company’s revenue and cash flow? What is your growth trajectory? How do your customers view your product/services? 
  • Accounting: Most buyers will conduct a review of the sellers’ financial statements (usually with the help of an outside accounting firm) to arrive at a comprehensive understanding of the target’s historical revenues, cash flows, and earnings. 
  • Legal: Buyers will engage a lawyer to review a variety of legal documents — including organizational documents, customer/supplier contracts, past litigation, real estate leases, and more — to look out for any current or potential legal liabilities. 
  • IT: A few common focuses include security vulnerabilities, ownership/structure of proprietary technology and/or custom software, and software and employee device inventories.

As part of due diligence, potential buyers typically request a wide range of documents from companies. These include but are not limited to:

  • Financial statements
  • Tax records
  • Detailed information about company assets
  • Contracts with suppliers and customers
  • Insurance coverage and any recent claims
  • Information on product/service offerings and current/past customers
  • Licenses and permits
  • Intellectual property information 
  • Information on employees and benefits 
  • Information on current/projected revenue streams

For sellers, working with a broker will help ensure you are prepared with all the necessary information ahead of time, and put your best foot forward during the due diligence process. 

At its core, due diligence is about uncovering and evaluating risk. During the process, buyers try to confirm the accuracy of the information the company has provided, as well as unearth any potential risks not detailed — whether intentionally or unintentionally. In addition to reviewing the paperwork the company provides, most buyers will also do some form of on-site due diligence in order to speak with company employees and get a better sense of how the organization functions on a day-to-day basis. Traditionally, buyers would set up a physical data room to account for the mountains of paperwork required to evaluate a deal, but today, virtual data rooms are the norm, allowing sellers, buyers, and brokers to securely store and access all the documents related to the transaction online. 

Ultimately, in addition to verifying concrete information about the business, buyers use due diligence as a time to evaluate the fundamentals of the business and gain as strong a grasp as possible on the intangible factors that are likely to play a significant role in its future success  What’s the management style of the leadership team? How engaged are its employees? How loyal are its customers? Who manages the company’s relationship with vendors and customers? Is information documented transparently, or does it live in the owner’s head? What is the market’s perception of the business, and how does it line up with its competitors? 

The timeline for due diligence varies. Often LOIs will set out a timeframe between 30-90 days for the process; however, the process often stretches beyond this (much to the chagrin of sellers).  Our firm was involved in a transaction that opened in November 2018 with an anticipated closing date for December 31, 2018. The transaction was relatively small; the value proposition easily understood. The deal finally closed on June 30, 2019 due to the buyer’s difficulty in getting firm commitments from its investment partners due to a lack of basic information that was made available early on to evaluate investment risk. The deal finally closed, but not with the first group of investors. They had long since lost patience and moved on to other opportunities.

Not all businesses sell. Some don’t sell for good reason: lack of a sustainable business model, depth of the management team, or undisclosed liabilities discovered in due diligence just to name a few.

Companies that are well prepared for the process of selling their business and transparent with respect to the information they provide can help their business brokers bring a qualified buyer to the table more quickly and improve the odds for a successful close in the most efficient timeline.  

How Northstar Advisory Group Provides Value to Business Buyers

Written by Gene Wright. Posted in Buying a Business

Before you start looking at possible businesses to buy, it’s essential that we help you think through key personal and market factors. These are the key factors that should drive your selection process and define the types of businesses that you will evaluate and acquire. Finding the right business for you will be the single biggest factor in your success as a new business owner. Getting it wrong can quickly turn your dream of owning your own business into a nightmare.

We’ve outlined below 4 critical elements to success in buying a business we’ve observed over the years in working with business buyers and sellers.  

  1. Personal Interests

Since you will be investing a significant amount of time in your new business, your search should focus on an industry that is in sync with your desired lifestyle. It’s not uncommon for business owners to build a business around a personal hobby or passion. As a business buyer, you may not have that luxury, but the business you acquire must be situated in an industry that you can immerse yourself in for an extended time period and be content doing the type of work that is required of a business owner in that field. One of the key drivers of success is enjoying and being interested in what you do!

  • Skills, Talents, and Experience

Passion alone won’t guarantee your success as a small business owner–you need to be honest about your skills and experience. For example, if you have never worked in the food service industry before, it’s unlikely that you will be a successful restaurant owner until you have accumulated experience in the field.

  • Capital Requirements

You will also need to consider your capital position since some industries require higher levels of investment than others. For example, manufacturing operations usually require much more capital to acquire than small consulting firms or businesses with fewer assets. It’s critical to make sure you have enough available capital to seriously pursue an acquisition in your chosen industry. Although seller financing may be possible for a portion of the purchase price, a thorough evaluation of your current capital position can help narrow your search to the business opportunities that align with your financial means.

  • Market Research

Market research, including an evaluation of short- and long-term industry forecasts, is essential in selecting potential business acquisitions. It’s important to identify an industry with the potential to increase the value of your investment. Additionally, you will need to examine the market in your geographic area to determine whether it is already saturated or if there is room for you to compete and grow your company. We can help in evaluating the condition of the regional marketplace as well as local trends that could impact your success.

There are four ways we add value to your search for the right business.

Develop Acquisition Criteria. We work with you to help you identify acquisition criteria to save you time, effort and money.

Comprehensive Due Diligence. We assist you in developing a comprehensive due diligence approach.

Create Pricing Models. Once we identify and evaluate target companies, we focus on pricing for each acquisition target. Our comprehensive approach includes tangible and intangible assets and enables judicious evaluation of target company attractiveness.

Post-Acquisition Advisory Services. If needed, we can provide post-purchase advisory services to assist in a smooth transition to the new owners.

Finding the right small business to buy is challenging. But the rewards of owning a business can far outweigh the costs–especially if you allow us to augment your search with your personal interests and professional capabilities

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