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Selling and buying businesses can be a hard decision, so take a look at some of these informative blogs that might help you make the right decision. When you are ready to buy or sell, give the professionals at Astra a call to get started!
By Jonathan Funk 23 Aug, 2017
On July 18th 2017, The Federal Government announced major tax changes on business owners - triple taxation.
Previously you would have received much more on the sale of the share or assets of your company.
The new legislation taxes could be as high as 75%.

Astra has a proven program that will mitigate this new onerous tax legislation. We would like to have the opportunity to show you how we can do that. To avoid “triple taxation” you must plan your exit strategy through a proven program. Our SuperMax and MiniMax programs will abate these new punishing tax changes. Our financial consultant will review your situation and demonstrate how Astra’s Super or Mini Max programs will work for you to save you many, many thousands. Please contact us at info@abc-astra.com or bhughes@abc-astra.com.


SUMMARY

This note is a summary and clarification of the 27 page announcement by the Minister of Finance on July 18 which has major implications for private business owners in Canada. Please take the time to review this note and give yourself time for reflection. We suggest you read this more than once.

The tax consequences of the NEW Rules could cost you millions of dollars without putting smart tax planning in place.

Scenario A - Under the old rules, you could sell your company’s shares and after it paid the capital gains taxes due, the net cash proceeds could be put into your hands personally with no additional tax to pay on the transaction. Not any more.

The proposed new rules should not impact your company 's ability to pay capital dividends (net after tax proceeds from the sale) to you as a shareholder unless the buyer and the seller are not dealing at arm's length (for example, between family members). With a non arm’s length transaction, the net proceeds are taxed again in your hands as an ineligible dividend at an effective tax rate of between 42 to 57% depending on your province of residence.

Scenario B - Under the old rules, you could sell your company’s assets and after it paid the capital gains taxes due (if any), the net cash proceeds could sent to your Holdco as an after tax intercorporate dividend with no additional tax to pay on the transaction. This would have allowed yo to redeploy cash for other investments. Not any more.        

The proposed new NEW Rules will disallow the inter-corporate dividend as a tax free transfer to your holdco and instead tax it as an ineligible dividend at highest possible tax rates.

Scenario C - Old rules: Shareholder dies, creating a deemed disposition of shares. No tax paid liquidity is in hands of estate to pay tax. Estate uses a capital loss manoeuvre in combination with “stop-loss” rules and acceptance of a promissory note from a corporation to mitigate the amount of actual tax due as a result of deemed disposition of shares when the shareholder dies.

The proposed new NEW Rules will disallow the estate from transferring shares with a high cost base to a parent company in exchange for a tax-free promissory note.    

NEW Rules : Shareholder dies, creating a deemed disposition (CRA considers shares and other personal property to be disposed/sold) of shares. No tax paid liquidity (ready cash (on hand) is in hands of estate to pay tax. Estate raises cash to pay this tax by selling corporate assets with attending cap gains tax "A". Net proceeds are paid off of the balance sheet to pay the cap gains tax on the deemed disposition caused by shareholder's death. This is Tax "B". However since it all came off the balance sheet, CRA wants additional tax as they regard this as a non-eligible dividend or Tax "C". This is "triple taxation". A+B+C=CRA The total tax bill could be as much as 75%!!!

Scenario D- Old and New rules are the same: Shareholder dies, creating a deemed disposition of shares. No tax paid liquidity is in hands of estate to pay tax. However life insurance proceeds come into and out of the corporation tax free by way of capital dividend account (CDA. Sec. 89) to pay required taxes. Estate now transfers shares to whomever it is directed by the Will of the deceased shareholder. No corp assets were sold, no taxable cash came off the balance sheet's current assets yet the cap gains tax were paid. The new shareholder's capital is still on the balance sheet but it is now tax paid or paid up capital (PUC). Dividend income paid at say 8-10% of the tax paid PUC are within CRA's "safe income" rules but taxed at the attending marginal rate.

Here are the main reasons tax practitioner’s advocate the use of life insurance in corporate-estate situations: A) it’s a lot cheaper than paying ANY amount of tax and B) it is already pre-approved by CRA and does not cause any tax burdens.

In summary: either from action or inaction when large blocks of capital are moved into the hands of a shareholder or an estate, the transactions are on CRA’s maximum tax radar. On the other hand if dividend income on capital is employed as a source of income, the tax rates are far less than taxes on salary or high amounts of capital treted as ineligible dividends.

In Brief, CRA does not want you to take capital off a balance sheet, but keep it employed ON the balance sheet, and CRA is satisfied.

Therefore smart planning will open doors for tax efficient succession planning for your family and provides options to negate asset sales triggering double or even triple taxation.
And, smart planning utilizes the Income Tax Act’s rules to get your hard earned capital into shareholders hands while you're alive either tax free or with a lot less tax paid during your lifetime and after death.

Bottom Line: Smart Planning will get you:
  • a strong balance sheet 
  • a company that will not be hurt or destroyed because of tax
  • happy shareholders 
  • a happy estate
  • satisfied CRA
  • Everybody wins!

Smart planning starts with us. Contact us now.

TIME IS NOT YOUR FRIEND – WE HAVE WAYS TO HELP
By Robert Hughes, Astra Business Corporation President 22 Jan, 2016

Astra, with their associates, have developed exit strategies using major banks and insurance companies to transfer ownership of your company in a manner similar to a department store ‘lay-a-way’ plan. There are two programs to choose from - MiniMax and SuperMax.

These programs offer a customized succession plans, which enable business owners to hand the reins of their business to a new generation or investor, while securing a TAX FREE retirement income stream, reducing risk, eliminating volatility and creating an estate legacy.

This is a strategy that has a stated time frame to transition the operation, and eventually, the ownership of the business. This succession plan maximizes the net cash flows for the remaining lives of the owner and spouse and if possible, creates a legacy for the surviving family members or investors.

Whereas you are looking to obtain a sale price of up to 4 to 5 times multiple, buyers have been reluctant to provide you with an acceptable purchase price with terms satisfactory to you. These alternate programs will provide you with an acceptable exit strategy with a financial benefit of  many times over what you had originally wanted  and while you are young enough to enjoy your retirement income.

I trust this is of interest. If so please advise and we will introduce you to our associate and start the process with a conference call where an in-depth detailed discussion will reveal how this program works.

Looking forward to working with you.

Click here for more information.

By Paul Woodhouse, MNP 15 Dec, 2015

A non-compete agreement is a covenant to the purchase and sale agreement that restricts the seller of a business from competing with that business in the future. Such covenants usually last for a specified period of time and may apply to a specific geographic area (generally the area currently being served by the subject company).

Non-compete agreements provide buyers with a measure of comfort in that the expected stream of earnings from the business being acquired will not be disrupted by competition from the former owner. The seller benefits because the buyer has confidence that the anticipated earnings will materialize and therefore the seller can maximize the purchase price.

In some cases, they receive an annual payment for a specified number of years. In others, the amount the seller receives is included as part of the total purchase price. In either case, the seller is granting a promise to the buyer that may have considerable value in terms of preserving the future earnings potential of the acquired business. Thus, a non-compete agreement represents an important (though intangible) asset for the buyer, quite apart from the operating assets.

Why put a value on non-compete agreements?

If the consideration paid to the seller for entering into a non-compete agreement is included as part of the total purchase price paid for the acquisition, there are three good reasons to assign a separate value to it.

Accounting Standards and Reporting Requirements
If the purchaser is a corporation, generally accepted accounting principles (GAAP) require the parent company’s financial statements to be consolidated with those of its subsidiary. Depending on the jurisdiction, these accounting rules have specific standards that require a purchaser to allocate the total purchase price paid in a business combination to the fair market value of all the tangible and identifiable intangible assets acquired (which would include the non-compete agreement). This provides stakeholders with more information on the true nature and cost of the acquisition.

Compliance with Income Tax Rules
Proposed changes to the Income Tax Act mean that any amount the seller receives for granting a restrictive covenant will be treated as ordinary income for income tax purposes. The buyer will generally treat the expense as the seller treats the income; in this case, it would be a deductible business expense. There are some exceptions to this general income inclusion rule. One exception is where the grantor and grantee jointly elect, in prescribed form with their tax return for the year, that the amount is an eligible capital expenditure to the buyer and an eligible capital amount to the grantor. Therefore, it is necessary for the parties to determine the value of the non-compete to ensure there are no unintended tax consequences.

Possible Future Damage Claim
In the event the seller breaches the covenant not to compete, the purchaser may have a claim for economic damages. The fact that a valuation was prepared at the time of the transaction demonstrates that the parties contemplated that real damages would arise if the seller was allowed to compete. This helps support the purchaser’s legal claim against the seller.

How should a non-compete agreement be valued?

There are two generally accepted approaches used to determine the value of a non-compete agreement:

Differential Valuation Approach
The differential approach involves valuing the business under two different scenarios. The first valuation assumes the non-compete agreement is in place and the second valuation assumes that it is not. The difference in the value of the business under each approach is attributed to the non-compete agreement. Because the differential approach involves a rigorous business valuation analysis under two scenarios, it allows for more flexibility in determining the net impact on future cash flows arising from potential competition from the seller. The downside is that this approach is more complex and time consuming.

Direct Valuation of Economic Damages Approach
The direct approach involves determining the present value of the potential future economic damages that would occur as a direct result of not implementing a non-compete agreement. The direct approach is somewhat simpler since it involves estimating the direct damages from competition, usually in the form of a percentage of income lost. This method is more widely used because of the need for only one estimate of future operating results, which makes the analysis less time consuming. Both methods, if properly applied, should arrive at a similar conclusion of value.

 

A Framework for Using the Direct Damages Approach

When using the direct damages approach, the first step involves a risk analysis to determine the maximum potential damages that could arise if the seller competes with the acquired business.

The second step is to determine the “expected value” of the losses based on a probability assessment that considers the likelihood that the seller would compete with the acquired business.

The third step involves determining the present value of the economic damages avoided over the term of the non-compete agreement.

 

Step 1: Estimate annual economic losses, assuming competition from the seller.

This step involves the following stages:

1.  Estimate future earnings or cash flow, assuming a non-compete agreement is in place. This will generally incorporate the same set of assumptions that a hypothetical market participant would use in estimating future operating results for the purpose of pricing the acquisition.

2.  Quantify the potential damages (in the form of reduced earnings or cash flow) if the vendor(s) were free to compete with the business post sale. This generally involves a two-step process:

1.  Perform a risk assessment that considers the key factors that could negatively influence the business projections determined in Stage 1. Depending on the nature of the business, the following questions should be asked:

Does the former owner have significant personal contact with customers?

If so, are these customers loyal to the former owner? How many customers could the former owner take to a new business and what is the profit related to these accounts?

Are the other employees loyal to this person and do those employees have strong relationships with customers?

Does the former owner have access to trade secrets that are critical to the company’s success?

Depending on the circumstances, financial damages may take the form of one or more of the following:

Lost sales to existing customers recruited by the former owner

Lost sales to new customers through the use of trade secrets taken by the former owner to provide a similar product or service

Lower gross profit margins due to reducing selling prices to compete with the former owner

Higher marketing expenses incurred in an attempt to mitigate damages (i.e., recoup the lost sales)

2.  Based on the above risk analysis, estimate the percentage of projected earnings or cash flow that would be lost due to seller competition. We have seen estimates ranging from 10% to 50%, depending on the nature of the business and the industry in which it operates.

3.  Apply this percentage to the annual projected cash flow determined in Stage 1. This represents your estimate of how much of the future earnings the former owner could take from the company if he or she decided to compete after the sale.

 

Step 2: Adjust the losses determined in Step 1 based on the probability that the seller would compete in the absence of a non-compete agreement.

This step involves performing a probability assessment to determine the likelihood that the former owner would compete in the absence of agreeing not to. It is likely to be the most difficult and subjective part of the analysis. Some of the factors that affect the probability of the former owner competing include:

The age of the former owner . Is the individual near retirement age or is she too young to retire and physically able to compete?

The former owner’s employment status. Has he entered into a management contract to stay on with the existing business? If so, this reduces the likelihood of competing with the purchased business, particularly if a significant part of the purchase price is held back and paid out over time, or is contingent upon business performance. Does the individual have other skills in a different industry in which he could find work that is unrelated to the purchased company’s industry?

The former owner’s financial resources. Is the individual wealthy or does she need to work?

Competitive entry barriers. Are there significant barriers to entry in this industry? If the business is capital intensive, does the individual have access to sufficient capital resources? If not, is it likely that the individual would be hired by a competitor?

The former owner’s track record. Has the seller sold a business in the past and subsequently started up a similar competing business?

The strength of legal agreements. Is the protection term and market area defined in the non-compete agreement reasonable and enforceable in a court of law? Are there other pre-existing legal obligations in place to help prevent the seller from competing?

Based on the above factors, estimate the probability that the former owner would compete with the purchased business if there were no restrictive covenants. The estimated probability factor is then applied to the losses calculated in Step 1(c) to determine the “expected value” of the losses.

 

Step 3: Determine the present value of the expected annual losses.

  This step involves determining an appropriate discount rate with which to calculate the present value of the expected losses. Consider using, as a starting point, the weighted average cost of the capital (WACC) used to finance the acquisition. Generally speaking, the cash flows associated with intangible assets have greater risk than those associated with tangible assets. This additional risk would generally support a higher rate of return to compensate the investor. However, since much of the risk in the cash flows was already removed through the probability adjustment (in Step 2), a significant risk premium (applied to the WACC) would likely not be appropriate.

Once a discount rate is determined, apply the appropriate present value factors to the expected losses (determined in Step 2) to quantify the value of the non-compete agreement. For accounting purposes, the value of this intangible asset would be amortized over the term of the agreement.

A simplified example of the valuation analysis described above is provided in the following table:

By Business Brokerage Press 01 Dec, 2015
When selling your business, reaching the letter of intent (LOI) stage is a great indicator of success. But, the process is far from over. There are many steps that still lay ahead that can derail or ruin the transaction. Below are 7 pitfalls to be aware of between the LOI and the closing of the transaction:

1. First, get the letter of intent done well, and read all the legal details.

The first step to moving from letter of intent to closing is to make sure that everyone understands all elements of the letter of intent, and that the letter of intent has a reasonable amount of detail.  Misunderstandings and miscommunications will blow-up a deal very quickly if the parties have different interpretations of the terms.

In the midst of negotiation, it may be tempting to leave a detail for later, or hope the other party didn’t notice some important detail, or leave an open item to later.  There is no one way to do things, but if you truly want the deal to happen, I have had much more success taking the extra time to explain a term or go over something again to make sure that everyone is on the same page.  The LOI sets the pace for the rest of the process, so it is important to do it well.

2. Keep the business on budget and performing well.

Ensuring that the business remains on track is critical during the process from LOI to closing. Although it may take a great deal of focus to close the deal, keeping the business running according to plan is necessary for the transaction. This is the most important, of many things, to balance during the closing process. Among private equity buyers, you will hear wisdom shared from investor to investor with things such as, “95% of all bad deals were off budget during the closing process.” The buyer will be watching every twitch of the business with extreme scrutiny. To a buyer, there is nothing more comforting than seeing the financial results comes in as expected.  Even better for everyone is having the financial results come in ahead of budget.  Yes, this is true even when you are the seller wondering if you could have gotten more for your business because it makes the buyer want to close the transaction even more and maybe some small horse trade will go your way in the end (and, there is always one more horse trade).

When the financial results are not on target, it forces the buyer to spend time and energy trying to figure out if the miss is a short-term blip or something more fundamental.  Better to avoid having the buyer to think twice about anything.

Most deals require the seller to operate the business as usual during the closing process.  This should be obvious and intuitive to all involved.  However, I have seen sellers try to be clever and change some aspect of the business during the last months or weeks to try and tweak the deal to be more favorable to them.  This never works.  First, it is counter to the spirit of the deal to keep operating the business as normal, and it’s very difficult to change any reasonable size organization from their normal operations without creating problems, both intended and unintended.  Furthermore, it is in the seller’s interest to keep the business operating normally just in case the transaction does not close. It is a fact of life that not all deals close after a signed letter of intent. The seller needs to be aware of this and not make any adjustments that they would not make if they were not selling the business.  In particular, do not change a strategy to fit the buyer until after the close.

3. If something bad happens, inform the buyer immediately.

Business results are rarely perfect and on budget.  If something happens, the best policy is to be up-front and inform the buyer immediately, just as you would want to be informed if your roles were reversed.  If done well, this can increase the buyer’s confidence in the seller and the business. If done poorly, it can torpedo the transaction in a heart beat.  In one recent situation where I was not directly involved, the seller lost several clients in late November that was going to reduce their revenue by >20% (probably only for a few months, but it wasn’t totally clear). The seller did not tell the buyer until the December and January financial statements were ready, and it cratered the deal. They may have had a chance to save the deal if they had been up-front immediately. More importantly, they should have done everything in their power to keep those clients and keep the business on track (or presented more conservative financial forecasts that accounted for some potential lost clients).

4. Have scrubbed and analyzed your previously presented financial statements.

Most serious buyers will perform a “Quality of Earnings” accounting due diligence on your company. This means that they will review, in detail, the financial statements that you have previously presented to make sure the earnings presented are high quality. It is inevitable that they will find various adjustments that make the earnings a bit better and a bit worse than expected — that are normal. However, it will save sellers a ton of time if they have performed their own analysis to find the unusual items or the items that the buyer may ask about. It is much more efficient to be prepared up-front than to scramble around trying to understand the questions yourself and to explain what the buyer may be finding.

5. Be organized.

The buyer will need all sorts of information about the financial results, legal, insurance, human resources, major contracts, etc. Of course, the seller wants the information to be strong and supportive of the picture that was painted during the sale process. Almost equally as important is how the information is organized and presented. Buyers appreciate indications that the company is well managed and organized — such indications provide more confidence to the buyer.

6. Manage the lawyers — don’t let them manage you.

The lawyers view their job as doing everything they can to protect you, so they will always take the most conservative path and recommend the most protected, conservative position.   There is nothing wrong with that, but if both parties take that same stance, there is no room to find a middle ground that makes sense. The lawyers work for you — you should have the confidence to tell them what you want, make the final business decisions around the deal, and not let the lawyers manage you. Finishing the Letter of Intent does not mean that all the deal decisions are done. There are many more small details and decisions in the final documents, and both parties need to continue compromising and negotiating the details that are not covered in the Letter of Intent.

7. Communicate well with everyone involved.

Special effort needs to be made to communicate (probably more than you think) among all the parties. And, special effort should be made to think about the best methods to communicate everything. Never take a shortcut by firing off an email when a phone call would be better. Everyone is on edge and making sure to communicate enough— and via the best method possible — pays off big time.
By Nelson Muller, an M&A advisory in Ashland, Mo 26 Nov, 2015
You pick up the phone, and BAM! You’re blindsided. The person on the other end of the line wants to buy your business. You freeze. You don’t want to say the wrong thing. Your mind races. What am I supposed to do now? Are my ducks in a row? Am I prepared to get what I think this is worth? What is this business worth? Is it worth anything?

Although this is the dream scenariofor many entrepreneurs, most business owners won’t be able to sell their companies. According to Business Reference Guide, 70 to 80 percentof businesses put on the market don’t sell.

Here are five things you need to do now—before you get that phone call—to build a strong business and prepare for a successful exit.

1. Hire and Develop Leaders in Your Organization

Avoid falling back on the old business maxim, “If you want something done right, you’ve got to do it yourself.”

The problem with handling the most important tasks and decisions yourself is that it doesn’t prepare the rest of your staff to takeover when you leave. Any new owner will be hesitant to take the reins of a business that depends solely on you.

Insisting on doing everything yourself also stifles your business growth because one person has limited bandwidth. Identify teammembers with leadership potential, and invest in their development early on.

2. Keep Your Business in Growth Mode

Don’t get distracted by one potential buyer. The odds of selling your business to anyone buyer range from 15 percent to 40 percent, depending on the study.

Your odds with this interested buyer are worse than 50/50, so it’s best to keep your business growth a top priority.

Making headway with new markets, new products, and new opportunities also makes your business more attractive to investors. Buyers like to see growth opportunity, so don’t plateau right before closing. Make some significant, measurable progress on growth before an exi topportunity arises.

Remember: Talk is cheap. Execution is valuable.

3.Build Systems

Building systems in your business is important for three main reasons: Systems help you hire and train good employees, they help you build a scalable business, and they create opportunities for you to explore recurring revenue models. All three are appealing to potential buyers.

4. Avoid Heavy Customer Concentration

It goes without saying that taking care of your biggest customers is important. But if a vast majority of your business comes from one customer, you may have too much of a good thing.

Businessesv with poor customer concentration are risky to buyers. Ideally, no single customer should account for more than 20 percent of your revenue. If this is the case for your business, try to acquire more customers to minimize that risk.

5. Keep Great Records

“Due diligence” is the term used when potential buyers peek behind the curtain to make sure what you’ve said about your business is true. If all the information is in your head and they have to take your word for it, this can be painful for you.

Make sure you keep accurate records. Procrastinating on your bookkeeping can make it all but impossible to catch up when potential buyers need to quickly access current information.

These five areas are all critical to your business, but juggling them all at once can feel overwhelming. Make a plan this week to execute on just one of these things, and you’ll avoid the crunch-time panic that’s familiar to business owners who don’t prepare an exit strategy. Of course, you should always seek advice from a mergers and acquisitions professional that has sold businesses and knows what to expect from the process.

In short, you need to focus on building a business,not just a job.This means keeping a potential buyer’s perspective in mind and growing a company that will be an attractive investment.

If you have a strong business, youc an exit at a premium. It just takes careful preparation before the opportunity to sell arises. If you wait too long, you may not exit at all.
By James Darnell | KLH Capital 30 Aug, 2015

Accessing the private capital markets can be tricky — especially for first time visitors. 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 and the investment banker should both be able to articulate the value drivers for the company. Clearly articulating these points can help a potential investor see the value of your business.

Below are 5 key value drivers that must be discussed with your business broker 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 base. An understanding of how a business makes money and who its customers are is essential for any Private Equity (PE) firm and deal negotiation. Too often, I see write-ups or pitch books of a business that do not explain how the business makes money. You must be able to answer that question; you have to succinctly be able to tell someone how the company makes money.

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 more organized Customer Relationship Management (CRM) and legitimate salesforce, can help demonstrate to an interested PE firm that you are working with regular, sustainable customers.

Last, but not least, 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 for many private equity firms. 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 comment on 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 make realizing a successful investment difficult for most PE shops.

PE investors 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 PE investors. Similarly, if a business is very cyclical, it can be challenging for an investor. Most PE firms use some form of leverage during an acquisition, and leverage and cyclicality is a very risky cocktail. It can go sideways on you very quickly.

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

3. Suppliers

We already discussed the addressable market and your customers, but now it is time to consider your 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 PE firm as soon as possible. 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 investors very nervous. Most PE investors 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. 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?

If there is no competition, then you still 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. 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 ecosystem 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.

Getting deals done in the lower middle market is so much more about the psychology of the stakeholders than actual financials. You need to make sure everybody is happy. This is why most PE firms will spend so much time getting to know the management team and making sure there is a fit. If you try and fit everyone into a predetermined box or equation, the deal will fail.

When it comes to financials, the numbers will be what they will be. At this stage of the process, the investor is probably most interested in seeing how organized your business is. The numbers need to be reliable. We don’t want to be in a situation where we’ve made a deal, then did some diligence only to discover that we were misled. In those situations we have to break the deal, which is disappointing for everyone involved. The more confident we feel in your ability to track numbers, the more confident we will feel about the deal. However, don’t worry about too many add-backs or no CFO — just be systematic with the process.

By Bob Hughes 15 Aug, 2015
It is unfortunate some buyers are not willing to work with us and agree to pay our “Finder’s Fee.” Buyers who cooperate with us are exposed to many more opportunities.

To those buyers not willing to pay our finder's fee, we say - you have passed by when opportunity was knocking.

We have a buy side team and a sell side team and the value of our buy side engagements is that we can find a much larger pool of sellers than you can find on your own. If we can find better deals, even considering our fees, then you have an obligation to your shareholders to take the best deal and pay our fee. The gut question for you is - "Is this deal, including the Astra’s fee, a better deal than any others you can find?"
There should be no problem for you to investigate. You are under no obligation to buy when you sign our agreement. We will even do searches for you at no cost or obligation.

You do your due diligence and if the price is right, including our finder's fee, and your offer is accepted, that's the only time you are obliged to pay our finder's fee. This sounds simple to me. How about you?

Should we be able to obtain a fee agreement with the owner, then you will not be obligated to pay a buy side fee. “We do not double dip.”

Astra Business Corporation
By Bob Hughes 28 Jul, 2015
CBI is a Certified Business Intermediary – Astra is a IBBA member with a CBI designate.

Do thoughts of selling your business ever cross your mind? As a business owner you certainly know that the day will come when you will walk away from your company’s operations. Selling your business will likely be one of the biggest decisions of your business life.

No doubt you have a good idea of what your business is worth. But there are many factors to consider when putting your company on the market. Is now the best time to sell? Should I look for a cash deal or should I consider certain terms? What about confidentiality?
Working with a professional business intermediary will provide the expertise to help you make those decisions. Consider teaming with a Certified Business Intermediary (CBI), a professional who fully understands what it takes to successfully sell a business. A CBI can bring significant value to the complex process and help you complete a sale that will include the best possible value and some peace of mind.

A Certified Business Intermediary, or CBI, is the designation awarded by the International Business Brokers Association (IBBA) to members that have met certain educational requirements and ethical standards. IBBA, with 1,500 members worldwide, is the largest international, non-profit association operating exclusively for the benefit of
people and firms engaged in the various aspects of business brokerage and mergers and acquisitions.

A CBI is an experienced, proven professional whose claim of competence is supported and documented. With the skills necessary to handle the marketing, negotiations and complex details involved, a CBI can successfully complete the purchase or sale of your business.
To earn the CBI designation, an IBBA intermediary must meet the following requirements:
  • Education - A CBI must complete a minimum of 68 class hours of business brokerage courses offered through IBBA and must demonstrate an ongoing commitment to professional development through continuing education and recertification.
  • Experience – A CBI must demonstrate competence in the application of knowledge gained through practical experience with a combined minimum of three years’ experience and education in business brokerage.
  • Knowledge – A CBI has to demonstrate a high degree of knowledge garnered through the completion of required courses and the passing of the comprehensive CBI examination.
  • Ethics – A CBI must thoroughly understand the IBBA’s Code of Ethics and apply the code to his or her business practices.
A higher level of education and training means that a CBI will have more access to people and information than other business brokers. A CBI has professional affiliations with hundreds of other intermediaries in addition to the most current industry information regarding taxes, government and legislation.

A CBI’s experience and knowledge of current marketplace conditions is critically important for anyone looking to sell a business. If you are considering the sale of your business, you need every advantage you can garner, primarily preparation, experience and knowledge.
By Bob Hughes 15 Jul, 2015
As a business owner considers placing his or her company on the market, ascertaining the proper value for the company is critical. Too often the owner assigns an unrealistic and unachievable arbitrary value then proceeds into the sale process only to be disappointed with the market’s response. As a result, the asking price is reduced several times. During this unfortunate period buyer prospects and valuable time is lost.

A company’s value is determined by a compilation of factors such as the company’s sales, earnings, performance, market outlook, personnel, net book value, and fair market replacement value of equivalent operating assets. But it can also be influenced by intangible assets like the company’s image, reputation and goodwill.

To maximize the fair market value of your business, it’s vital that you capitalize on those intangible assets.

  • Develop key employees. Buyers generally aren’t interested in paying a premium if the business relies on you for its success. Remember to delegate responsibility to key employees and involve your key staff members in the decision making process. Demonstrating that your company’s success is reliant on your capable, well-trained employees – not just you – will pay off at the time of sale.
  • Document what you do. Be sure that job descriptions, operation processes, andstrategic plans are documented. Documented records and plans give a buyer greater comfort that he or she will be able to emulate your successful growth and will help your buyer obtain financing. Also, be sure to keep business records like sales and expense reports, internal profit and loss statements/balance sheet, and tax returns clean and well-organized.
  • Build relationships. Name recognition, customer awareness and your reputation are all part of your business value. Even if your company doesn’t have many hard assets, your relationships are key. Consider diversifying both supplier and customer accounts.
  • Improve cash flows. A potential buyer wants to see the “true cash flow.” And, of course, in the business world cash is king. Be sure you are driving all income to the bottom line.
  • Review your assets. Sell off or dispose of unproductive assets or unsalable inventory. Remove or buy off any assets that are primarily for your personal use.
  • Find and build your niche. You don’t have to be everything to everyone. Buyers will pay a premium for a niche that has barriers to competitive entry.
  • Remodel, clean, and organize. What’s the first thing anyone does when they put their home on the market? They spruce things up and make sure everything is in its right place. Yet, in business, that’s rarely considered. A well-maintained facility will get the best price. Even businesses that lease space can benefit from a thorough cleaning and organization to convey a feeling of quality and efficiency.
There are several approaches to valuing your business.

Balance Sheet Value

There are several balance sheet valuation methods, including adjusted book value, book value and liquidation value. The adjusted book value is determined by revising the asset’s book value to reflect the cost it would take to replace the assets in their current condition. This method requires the total values to be offset against the sum of the liabilities.

The book value considers the figures from the company’s financial records, as depreciated at the time of the sale. The book value can pose some difficulties for sellers, particularly if the seller has depreciated the assets too much to gain prior tax advantages.

The liquidation value is the amount that could be realized if all assets – equipment, furnishings and inventory – were sold separately. This value is typically much lower since it doesn’t consider a company’s intrinsic value.

Income Approach

The income approach takes into consideration the company’s level of earnings using a capitalization rate, discount rate or multiplier. Several income approach methods are frequently used. Each method requires a level of earnings and a conversion factor to translate the earnings into a company value. Selecting the proper level of earnings – after-tax, pretax, discretionary or cash flow – and matching it with the proper conversion factor – discount rate, cap rate or a multiplier – is critical to calculating a reasonable value.

Market Approach

The market approach sets a value based on the values of other businesses that have been sold. Setting the market value involves researching the sale prices for similar businesses in a geographic area. In some cases, however, finding a company that is similar in many ways to your company may be difficult.

Whatever your goal, you want a good advisor to help you assess the value of your company. Question your advisor on the effects of deal structure and how multiples are used. A business owner should never accept a computer-generated valuation or a one-size-fits-all approach when selling the business. And don't be impressed by the person who presents the highest value – you may only be setting yourself up for failure during the sale process.
By Bob Hughes 30 Jun, 2015
So you want to be your own boss. There are certainly pros and cons to both buying and starting a business. If you do a careful analysis, you’ll learn what many seasoned entrepreneurs have discovered…the risk-to-reward ratio is tipped in your favor when you purchase an existing business.

Starting a business of your own can pay great dividends, but it’s important to understand that the risks are significant. Most start-up businesses will falter and eventually die. According to Michael Gerber, author of The E-Myth Revisited, 40 percent of new businesses fail in the first year and 80 percent fail within five years.
  • On the other hand, purchasing an existing business reduces an entrepreneur’s risk while creating opportunities for tremendous profit. There are a number of reasons to consider the purchase of an existing business rather that starting one:
  • Proven Concept . Buying an established business is less risky – as a buyer you already know the process or concept works. Financing a purchase is often easier than securing funding for a start-up business for that very reason—the business has a track record.
  • Brand . You’re buying a brand name. The on-going benefits of any marketing or networking the prior owner has done will transfer to you. When you have an established name in the business community, it’s easier to place cold calls and attract new business than with an unproven start up.
  • Relationships . With the purchase of an existing business, you will also be buying an existing customer base and vendor base that took years to build. It’s very common for the seller to stay on and transition with the business for a short time to transfer those relationships to the buyer.
  • Focus . When you buy a business, you can start working immediately and focus on improving and growing the business immediately. The seller has already laid the foundation and taken care of the time-consuming, tedious start up work. Starting a new business means spending a lot of time and money on basic items like computers, telephones, furniture and policies that don’t directly generate cash flow.
  • People . In an acquisition, one of the most valuable and important assets you’re buying is the people. It took the seller time to find those employees, develop them and assimilate them into the company culture. With the right team in place, just about anything is possible and you will have an easier time implementing growth strategies. Plus, with trained people in place you will have more liberty to take vacation, spend time with family, or work on other business ventures. When start-up owners and independent contractors go on vacation, the business goes too.
  • Cash Flow . Typically, a sale is structured so you can cover the debt service, take a reasonable salary, and have some left over to take the business to the next level. Start-up owners, on the other hand, often “starve” at first. Some experts say start-ups aren’t expected to make money for the first three years.
  • Risk . Even with all these advantages, some entrepreneurs believe it is cheaper, and therefore less risky, to start a business than to buy one. But risk is relative. A buyer may pay $1 million, for example, for an established business with strong cash flows of approximately $200,000 to $300,000. A lending institution funds the transaction because historical revenues show the cash flow can support the purchase price. For many people, however, that is far less risky than taking out a $300,000 loan with an unproven concept and projections that may or may not be realized.
  • Becoming your own boss always involves a risk. When you buy a business, you take a calculated risk that eliminates a lot of the pitfalls and potential for failure that come with a start-up.
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