Valuing and Selling Your Entrepreneurship

By Alan Walsh, 7/10/2011

You’ve spent time & money, and taken risks, developing a successful entrepreneurship.  For reasons of your own (usually upcoming retirement), you’re thinking of selling it.  You have the vision of making a nice pile of money.

You’re probably going to be disappointed.

First, you’ve probably got an inflated value in your mind.  Most do.  Second, the form of sale probably won’t take place the way you envision.

All of this, of course, assumes your business is sellable.  Many aren’t, for a variety of reasons.

If you have a stock company, you probably envision making a simple stock sale.  Unless your company’s public, it probably won’t happen that way.  The most likely scenario is that the buyer will want to do an asset purchase. They buy the assets, and leave you with all the liabilities (accounts payable, debt, legal obligations, etc.) to deal with. They do this for simple reasons.  It can be very difficult and expensive conducting due diligence to identify all of the real and potential liabilities; especially for a private company.  They don’t want to buy the firm and then get a nasty surprise.  For instance, you might have a legal issue open that hasn’t been litigated yet.  Finding issues like that, when the owner’s hiding them, can be a daunting challenge.  It’s easier to just buy the assets and let you worry about all those nasty obligations.  This type of purchase usually simplifies the buyer’s tax issues.  It also resolves common-sense issues; such as the business owner who tries to drain all the cash and valuable assets out of the business prior to the transfer of ownership.  The sale contract will inevitably contain a clause to adjust the price tag for changes in assets between deal-time and ownership-transfer time.  Less assets – less payment.

Conversely, assets are much easier to analyze and value; although most entrepreneurs contemplating selling tend to inflate the value in their minds.  Cash can be handled at face value.  Hard assets, such as facilities and equipment, can be fairly market-assessed by an independent professional.  The whole issue of “soft assets”, such as the company’s customer base and earning capability (all that stuff that falls under the category of “goodwill”), can be handled via a simple formula based upon projected sales & profit; looking at the last couple of years performance.  There might be special items such as patents and copyrights.  Valuation of these items largely becomes a function of the buyer’s eagerness to acquire them (in some cases, these may be the only assets they’re really interested in).  This is usually your brightest prospect for negotiation.  Usually this is factored into the sales-based formula mentioned above.  After all, the whole issue for the buyer is the ability to generate sales & profits as new owner.

Accounts Receivable are usually handled on a discounted basis whereby there is partial payment up front, and then a final settlement after a period of time; typically 90 or 180 days.  If the buyer can collect the A/R, you as seller will get paid.  If not, the uncollected A/R will be handed back to you; and you might even have to make a payment to the seller.

Take these factors into account, and the final price tag the buyer’s willing to pay will probably be much lower than your “greedy capitalist” mind envisioned.  You’ll also be responsible for settling all debts, and collecting any open A/R.

If you’re one of the fortunate few who possess a “hot commodity”, such as the season’s hot new video game, then your negotiating power can go up.    In such cases, the buyer might be willing to pay a more inflated price.  We’ve all heard stories of businesses selling for inflated values based upon their perceived prospects.  Most businesses don’t fit this model.

Remember that buyers are usually looking for “bargains”, i.e.:

• Troubled companies that they can buy cheap and fix easily
• Companies with seriously  undervalued assets
• Cash-rich companies (nothing like buying you with your own money)

Before you contemplate a sale, you should consult with people who can help you determine the company’s marketability and value.  Don’t go into discussions unprepared.  Do your homework.

Merge in haste – repent at leisure

(September 21, 2009)

By Liz Gold

If you thought this year was big for mergers, brace yourself – there’s more to come.

Top consultants say that the accounting profession is in the midst of a merger frenzy that could well continue for the next three years.

Most mergers over the past several years occurred because firms were looking for new talent and lucrative client niches, according to Joel Sinkin, president of Accounting Transition Advisors in New York.

Now, with the economic downturn and the wave of layoffs that hit during the spring, mergers are emerging for additional reasons as well. “I have firms considering succession deals because they can use the clients, too,” Sinkin said. “Now you can get the staff to get the work done. It’s much more intriguing to them to pick up business, not just people, and that’s a big stimulator to the marketplace.”

Sinkin said that his company has seen 25 percent more merger activity this year than last.

A flurry of recent mergers has already stimulated the marketplace. New York-based Marcum has plans to merge with Margolis & Co. – a 70-person CPA firm based in the Philadelphia area – after merging with Miami-based Rachlin LLP in May. Meanwhile, Bay-area firms Greenstein Rogoff Olsen & Co. and Ronald G. Boyer Accountancy Corp. merged in August, bringing Boyer’s four-person team to GROCO’s Danville, Calif., office.

Consulting concern LECG announced its plans to merge with Smart Business Advisory & Consulting in August as well, sharing the strengths of each organization’s niches. The fate of Smart & Associates, which had operated in an alternative practice structure with Smart Business Advisory & Consulting, has yet to be determined.

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Undue Diligence – Accounting Rules Killing M&A Activity

CFO.com:

Merger-and-acquisition volume has been dragging in 2009; it was down more than 40% over last year at the end of July, according to Thomson Reuters. One reason for this moribund market: accounting rules.

Some 44% of executives polled in a recent Deloitte Webcast say they have changed their deal strategy in response to FAS 141(R), new merger accounting rules that may require ongoing fair-value testing of assets and liabilities that are acquired, and disclosures of any changes. As a result, potential acquirers are intensifying due-diligence efforts, according to Stamos Nicholas, Deloitte’s national Business Valuation service line leader, and looking carefully at the accounting implications of deal structures very early in the process. “No one wants to get blindsided on a bad deal with these new rules, which require a lot more transparency,” he says.

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The Coming Takeover Boom: Oil & Gas Sector

By Chris Mayer

“Work eight hours and sleep eight hours and make sure that they are not the same hours.”

– T. Boone Pickens

Inflation can do tricky things to markets. It creates distortions. In those distortions, an intrepid investor can find some big moneymaking ideas. I think we’ve got one opening up in oil and gas, and it is not without precedent in financial markets. In fact, it’s starting to look a little like the tail end of the 1970s in some respects.

In the spring of 1969, the Dow Jones industrial average stood at 969. By 1982, the Dow hit 1,071. That’s thirteen years of going nowhere. (We’ve had 10 years or so of going nowhere, though the ride between the poles has been anything but boring).

The problem is inflation makes that performance look better than it really was, like when a crooked judge makes a fight look close with a split decision even when the one fighter can barely walk to his corner and everybody in the building knows it was a rout.

Adjusted for inflation, or the weak dollar, the Dow was really more like 400. That makes it one of the worst stretches for the market since the 1930s.

The consumer price index, that flawed measure of inflation, doubled from 1960 to 1982. This is why a generation of people grew to believe that the best way to buy a house was to borrow all you could afford. And for a time, that looked brilliant. As Robert Sobel relates in a history of the period, a modest suburban home going for $30,000 in 1969 sold for $300,000 13 years later. With a lot of debt, your returns were much greater.

Of course, that kind of thinking eventually got us into a heap of trouble, as we now know.

But that period of time also had an effect on Corporate America’s balance sheets. When a company buys an asset, say a factory, it records its cost on its books. It will then depreciate this asset over time. So the value of the factory on its books will decline over time.

In a period of high inflation, its book value will be understated. The cost of a similar factory will be a lot higher in dollar terms, though the company will still show the old figure.

In other words, during periods of inflation, book values understate the true value of corporate assets. This happened in the 1960-82 period. Combine that phenomenon with a stagnant stock market and, eventually, you get some very cheap stocks. This is exactly what happened during the inflationary 1970s. Thus, by the early 1980s, stocks were quite cheap indeed.

In fact, by July 1984, S&P reported that 30% of the stocks on the NYSE traded below net tangible book value. The old value mavens like Ben Graham would have had a field day.

What happened next, though, is what interests us especially. The low stock prices kicked off a takeover boom. The 1980s takeover mania was the busiest since the “age of Morgan at the turn of the century,” Sobel reports in his The Age of Giant Corporations. The 1980s was the age of the LBO, Barbarians at the Gate, Michael Milken and the corporate raider.

The oil industry also had its takeover boom. In fact, the outlines of the 1980s oil and gas industry look similar to today’s. In 1970s, there was a drilling boom as people thought that oil and gas prices would rise indefinitely. That collapsed and then you had oil and gas companies sitting on huge reserves they built up during the boom.

So in a time when it cost $15 a barrel to get oil out the ground, many oil companies traded for $5 a barrel in proven reserves. Getty Oil traded for $72 per share, with assets of $250 per share. Marathon’s stock went for $68, even though each share had $210 in assets backing it up. And on and on it went.

Enter T. Boone Pickens. An Oklahoma-born geologist, Pickens was well aware of the value of these companies. He started going after them and making millions of dollars as bidding wars ensued. He lost several of these, but still cleared millions in profits.

There was a roll call of takeovers in the industry during this time — Shell bought Belridge Oil for $3.6 billion, DuPont bought Conoco for $7.4 billion and U.S. Steel took out Marathon for $6.5 billion. (Yes, U.S. Steel thought it would be smart to diversify). These were some of the bigger deals.

I won’t go too much into the history of this period, and perhaps I’ve already gone into too much detail. But I think something similar may be unfolding in today’s market.

In oil and gas, we have many companies trading cheaply in the wake of a drilling boom gone bust. What we need now is a T. Boone Pickens to shake things up.

When I look at some of my favorite oil and gas stocks, like Contango Oil & Gas (MCF:amex), I see stocks trading for far less than what it would cost you to find those reserves. If I were a natural gas producer, I’d look to pick up stocks like these, rather than drill new wells. At some point, I think that will happen and we’ll see lots of buyouts in the oil and gas sector.

Natural gas is very cheap right now, but it won’t always be the case. In a new research report by Tudor Pickering Holt & Co., a very good firm specializing in energy, $7.50 natural gas prices is forecast for next year! That’s pretty bold considering natural gas is under $3.00.

The firm bases this prediction on a comprehensive, bottoms-up model that takes into account rig count, decline rates on existing wells and other variables. According to Tudor Pickering, “The die is cast for 2010” — there is no way to get around a dramatic decline in natural gas production next year. And even assuming tepid demand for natural gas, we’re going to have a very different picture in natural gas next year.

After that, Tudor Pickering predicts the market will get full again by 2011. If it is right, we have a great window to make money between now and probably the middle of 2010 in natural gas.

PepsiCo Beats the Others “Old and Cold”

Pepsico Inc. has reached an agreement to acquire its two largest bottling companies, Pepsi Bottling Group, based in Somers, New York, and PepsiAmericas, based in Minneapolis. The transaction is conditioned on, among many other things, securing an opinion of counsel that the acquisitions will, in each case, qualify as tax-free reorganizations within the meaning of the Internal Revenue Code.¹ We are as confident as we can be that these opinions will be forthcoming.

The acquisition of each bottling group will be structured as a so-called forward triangular merger. Thus, the bottlers will be merged with and into Newco, a wholly-owned subsidiary of Pepsico, named Pepsi Metropolitan Bottling Co.

Link to article:

http://www.cfo.com/article.cfm/14205669

Will Whopping Goodwill Hits Hurt Deals?

The hits just kept coming last winter, as company after company reported huge goodwill impairment charges along with their 2008 earnings. Among the biggies: Conoco Phillips’s $25 billion writedown and CBS Corp’s $14 billion one, plus multi-billion impairment charges from Citigroup, Regions Financial, and AIG.

Link to article:

http://www.cfo.com/article.cfm/13940669