In today’s economy, arriving at a reasonable price is more important than ever. One way to arrive at a fair price for both buyer and seller is to adjust the price using benchmarks. Following is some information on using benchmarks from the 2009 Business Reference Guide along with a business entry from the Guide as an illustration. For more information on the 2009 Business Reference Guide and the Online Business Reference Guide, see the advertisement following the article.

We feel it is very important, in analyzing and pricing a business, that you can compare it to similar businesses or benchmarks that are unique to this type of business. One common benchmark unique to each business is the expenses. We have included as many of these as we could find. Many have been contributed by Industry Experts. If no source is mentioned, then you can assume that an Industry Expert(s) has supplied them. In many cases we have used a breakdown of expenses from IBISWorld, and there is an attribution following the data. The example below is similar to those contributed by Industry Experts. The information from IBISWorld will have an attribution at the bottom.

Expenses as a percentage of annual sales:

Cost of Goods Sold…………………………..20%
Payroll/Labor Costs…………………………..40%
Occupancy Cost………………………………20%
Profit (estimated)………………………………20%

Important Note: The figures in the expenses as a percentage of annual sales may not always add up to 100 percent. We provide only the major categories, and there may be other expense items not included which would make up any difference. Also, in many cases, we have to meld the figures from several different industry experts or sources. This may also cause some totals to slightly exceed 100 percent.

There are also a lot of informative benchmarks, such as sales per square foot, sales per employee, etc.

Some of the benchmark data is from www.bizstats.com. The estimated sales data, especially from restaurants, is from Nation’s Restaurant News, an invaluable resource, and the Franchise Times, also an excellent resource. Still others are from our Industry Experts, local newspapers, magazines, newsletters, etc. Many are also from IBISWorld, a subscription research service, which we use – it’s an excellent resource.

Benchmarking

We mentioned, at the beginning of this section, that if the rule of thumb was used properly, the price derived could be more accurate than simply multiplying the sales by the percentage rule or the SDE multiple. Reviewing market-driven data, one can reasonably assume that a 10 percent swing (that’s our number, yours may higher or lower) on either side of the percentage multiple would allow for the additions or subtractions to arrive at a more accurate multiple of annual sales. Using our example above, the 40 percent figure, as well as available data and information, we could lower or raise that percentage by no more than 10 percent, and our multiple could be more accurate.

Critics of rules of thumb claim that a rule is simply an average and doesn’t allow for the variables of each individual business. Comparing the business under review with industry standards—benchmarks—can allow one to raise or lower the percentage accordingly. A 40 percent figure then could be as low as 30 percent, or as high as 50 percent. The review of market data has, for some businesses, percentages that range from almost zero percent to 100 percent; however, these extremes are quite rare. They are usually based on some quirk in the calculations or in the business itself—oddities such as it was closed when sold, or was so small that the selling price was not reflective of the sales.

The first step is to review any of the Pricing Tips, Benchmarks, and the other information available about the business under review. Many of the Pricing Tips are contributed by our industry experts and can help in this process.

The Benchmark section can help you look at the vital signs of the business and compare them to similar businesses. For example, looking at the expenses as a percentage of annual sales can be a good start.

For example, if the business under review has an occupancy percentage of 12 percent against the average eight percent benchmark, then perhaps the price should be reduced to compensate for the higher rent. The rent is pretty much a fixed expense; but the higher the rent, the lower the profit.

Certainly a new owner could lower some of the expenses, but a trained labor force, for example, is hard to replace. Obviously, reducing the percentage multiple is a judgment call; but let’s face it, even business valuation is not a science, but an art—and judgment plays a large part in it.

Another important benchmark is based on employee productivity. For example, under AAMCO transmissions in the Guide, there is the following statement: “A shop should generate $3,500 to $4,000 per technical employee per week.” If you are pricing a transmission business or even a similar one, the “$3,500 to $4,000 per technical employee per week” is an important benchmark. Does the business you are reviewing stack up against the benchmark?

Here are some revenue per employee figures from BizStats (www.bizstats.com), but keep in mind these are just “ballpark” figures and a bit dated so they should be used to serve merely as guidelines. BizStats recently merged with BizMinor, a large business data site. www.bizstats.com

Type of Business……………………Cost of Labor……….Rev. per Emp.

Ice cream & soft serve shops……………23.0%……………….$30,539
Donut shops………………………………..25.9%……………….$37,926
Drinking places……………………………..21.5%……………….$38,269
Convenience stores…………………………9.5%……………….$109,48
Beer, wine, & liquor stores……………….. 7.5%…………….. $173,645
Gasoline stations……………………………5.8%………………$214,916
Sporting goods, hobby, & musical
instrument stores…………………………..11.6%………………$114,100
Book stores, in general…………………….11.8%……………..$103,517
Family shoe stores………………………….11.0%……………..$112,517
Misc. store retailers…………………………13.0%……………..$103,733
Florists………………………………………..21.3%………………$52,359

Note: The figures include both full-time and part-time employees, and are not what they earn, but rather the sales they generate in a given year. BizStats contains many others—the above are just some examples. The revenue per employee is another benchmark that can be used to: 1. See how the business under review stacks up against its peers, and 2. Provide an excellent way to see how the business can be improved—a good selling point. If, for example, the business under review doesn’t stack up very well with the benchmarks, then a new owner may be able to increase the sales and profits.

Another common benchmark is sales per gross square foot. Here are examples from some large restaurant franchises and chains, again from www.bizstats.com. Again, they are a bit dated, but they will give you an idea of what these popular restaurants do. You can compare them with similar businesses to see how they stack up with these successful operations.

………………………………..Sales Per………. Avg. Store……….Avg. Sales
Company……………………..Sqr Foot…………Size……………….Per Store

Cheesecake Factory………..$1,020…………..10,730……………$10,940,800
Krispy Kreme…………………..$859…………….4,600……………..$3,952,000
Papa John’s…………………….$575…………….1,300……………….$747,000
McDonald’s……………………..$543…………….3,000…………….$1,628,000
Applebee’s……………………..$454…………….5,000…………….$2,975,000
Panera Bread…………………..$418…………….4,400…………….$1,840,000
Denny’s…………………………$270…………….4,800…………….$1,294,765
Schlotzskys Deli……………….$147…………….4,000……………….$588,000

These are just a few examples. Keep in mind that many of the businesses above are company-owned operations. They are essentially completely help-operated, but can be a good gauge when compared to the businesses you are reviewing. Owner-operated businesses should be more tightly controlled than management-operated.

Benchmarking allows one to look at a business from an entirely different viewpoint. Look at the revenues per employee, the sales per square foot and average sales per store. These can play a part in the success, or lack of it, of a business. Even rough comparisons can provide sufficient data to raise or lower the percentage to arrive at a more accurate multiplier.

The data above gives you an idea of the information that is available. We have found that BizStats has a lot of valuable information. Go to www.bizstats.com. Nation’s Restaurant has a lot of data on the restaurant and quick-service businesses. For subscription information, go to www.nrn.com.

Franchise Times is also an excellent resource for benchmarking. For subscription information, go to www.franchisetimes.com. We have also found Forbes magazine full of interesting information, especially on valuation issues. Associations also have valuable information. Unfortunately, many of them are now furnishing it to members only. If it’s really important, we have found that contacting the association by email may result in finding someone who is willing to help.

IBISWorld is a wonderful source of information. We are members; and, although not inexpensive, it is very useful. They do sell their industry-specific reports individually; so if you are working on a larger business where information is needed, go their Web site at www.ibisworld.com and take a look. A quick profile is usually free, so go to the site.

______________________________________________________

BUSINESS ENTRY FROM 2009 BUSINESS REFERENCE GUIDE

Chiropractic Practices

SIC: 8041
NAICS: 621310
Number of Businesses / Units: 35,800

This industry comprises establishments of health practitioners having the degree of D.C. (Doctor of chiropractic) primarily engaged in the independent practice of chiropractic. These practitioners provide diagnostic and therapeutic treatment of neuromusculoskeletal and related disorders through the manipulation and adjustment of the spinal column and extremities, and operate private or group practices in their own offices (e.g., centers, clinics) or in the facilities of others, such as hospitals or HMO medical centers.

Rules of Thumb

60 to 65 percent of annual sales includes inventory

2.5 to 3 times EBITDA

General Information

“Many modalities of care, impacts transferability of patients”

“States with the most chiropractors. The five states with the most active licenses include California (13,554), New York (6,225), Florida (4,755), Texas (4,190), and Pennsylvania (4,000).

“States with the fewest chiropractors. The five states with the fewest number of chiropractors with active licenses are Alaska (178), Wyoming (205), Vermont (247), North Dakota (258), and Rhode Island (272). The District of Columbia reports 60 active licenses.”

Source: “A look at chiropractic statistics and opportunities” www.chiroeco.com

 

Expert Ratings

Competition	2.8	(1=Lot of : 4= Not Much)
Amount of Risk	2.4	(1=Very : 4= Not Much)
Historical Profit Trend	2	(1=Down : 4= Up)
Location & Facilities	2.4	(1=Poor : 4= Excellent)
Marketability	2.4	(1=Low : 4= High)
Industry Trend	2.4	(1=Declining : 4= Growing)
Ease of Replication	1	(1=Easy : 4= Difficult)

 

Expert Comments

• “Hard to finance relative to other healthcare practices. Easy startup with low cost.”
• “Insured practices subject to more risk”
• “Lots of competition in some locales. High loan default rate. Low cost/barrier to entry. Many buyers have bad credit history.”
• “Insurance reimbursement is on the decline in many sectors, especially Medicare and WorkComp. Past 10 years’ increasing values during hot economy are likely to be unsupportable in event of an economic downturn which will reduce patients’ cash expenditures.”

 

Questions

• “School of practice, ancillary services”
• “# FTE DCs? # hours worked/week for each DC? Modalities offered? Practice focus? i.e., personal injury, wellness, workers comp, rehab, etc. Any recent/pending legislation affecting practice income/insurance reimbursement? Payer mix? Ancillaries offered and % income (e.g., pillows, nutritionals, orthotics, creams, wraps, etc.)”
• “If the buyer is not a licensed chiropractor, the buyer should inquire of the state if a non-chiropractor is allowed to own a chiropractic practice or employ a chiropractor in that state.”

 

Pricing Tips

“Depends on hours worked. Value of equipment can vary considerably depending on techniques/technology. Equipment value for solo practice may range from $20K to $150K+ so this can affect value quite a bit. Price usually does not include A/R and sold as asset sale.”

“Cash practice is worth more than insured practice.”

“Normal selling range about 60% to 70% of gross income. Typical solo practice grosses $250K to $350K/year.”

“It is my personal belief that chiropractic market values are overheated, as practice sales are occurring that are difficult to support with earnings. Some lenders are leaving the market for the same reason, due to high & increasing rates of default on loans to buyers. I find that values of [3-4x (SDE minus one owner’s market rate salary for work performed)] can be supported by earnings, the income approach to valuation, and the principle of substitution. On the other hand, there are demonstrated sales far above this level.”

“Pricing varies widely by location and type of practice, cash or insurance-dominated. Insurance reimbursement is still trending downward; Medicare is planning further reductions which other insurance companies will follow. Statistics are similar to medical family practice.”

“Are you and the doctor a compatible personality match? Is the personality of the selling doctor vivacious and outgoing, while the ‘new’ doctor is a little reserved? Is your chiropractic technique compatible with the seller’s? Every instance of non-compatibility may mean one fewer patient will remain with you.

“With compatibility being addressed, I value the practice and goodwill to be equal to one-year net income. This figure will be corrected based upon a few factors:

• Blend of patient financial classes
• Insurance dependency / non-dependency
• Selling doctor’s philosophy (pain practice / wellness practice)
• Percentage of actual overhead (high overhead lowers value)

“Purchasing a practice is a very smart thing to do. I would always look for a practice to buy rather than start fresh.”

Source: From an article by Bruce A. Parker, D.C. in Today’s Chiropractic. For more information, go to www.bruceparkerconsulting.com.

 

Benchmarks

Statistics
Number of Enterprises	61,655
Average Profit Margin	28.0%
Average Revenue of Enterprise	$201,384

Source: IBISWorld, April 2008

Product/Services	Share
Low back Pain	68.0%
Other	32.0%

Source: IBISWorld, April 2008

Cost Structure

Item	Cost
Wages	33.0%
Rent	7.5%
Purchases	5.0%
Utilities	2.6%
Depreciation	2.2%
Other	21.7%
Profit	28.0%

Source: IBISWorld, April 2008

“65-75% overhead”

Personal Characteristics	Group/Partnership	Solo
Mean billings	$671,870	$322,653
Median billings	$547,500	$250,000
Mean collections	$471,354	$226,147
Median collections	$402,500	$182,500
Mean net practice income	$195,891	$110,522
Median net practice income	$120,000	$75,000

Expenses	Group/Partnership	Solo
Advertising	$16,434	$9,218
Malpractice insurance	$3,390	$1,990
Office lease or rent (annual)	$34,531	$18,649
Wholesale cost of products	$10,532	$6,829

Source: Source: Chiropractic Economics, Vol 53, Issue 8, May 22, 2007, www.chiroeco.com

“Typical solo practice grosses $250K–$350K/year, though many make less. Monthly charges in A/R 2.4. 150 avg weekly patient visits/DC. Typical owner DC compensation about $98K. Typical associate DC compensation about $52K.”

“The ‘Typical’ Chiropractor
According to the survey data, the typical full-time chiropractor is a Caucasian male who is in professional practice from 30 to 40 hours per week. Most chiropractors (61.8%) practice in a single-practitioner office. Typically, doctors of chiropractic also have a baccalaureate degree and participate in continuing education exceeding 21 hours per year; however, about two-thirds have not worked toward certification in a specialty area. Similar to the 1998 survey data, which showed 46.6% of chiropractors had practiced 5 to 15 years, 42.3% of those in the current survey have been in practice for 5 to 15 years; a weighted average of responses reveals that the average chiropractor was in practice for 13.2 years in 1998 and 15.6 years in 2003.”
Source: National Board of Chiropractic Examiners

Components of Chiropractic Practice
Direct patient care	52.9%
Documentation	18.9%
Patient education	15.1%
Business management	13.2%

Source: National Board of Chiropractic Examiners

Reimbursement Categories, Managed Care, and Referral

Private Insurance	21.5%
Private pay/cash	21.2%
Managed care	19.4%
Personal injury	13.6%
Medicare	10.8%
Workers’ Comp	07.8%
Pro Bono	03.9%
Medicaid	01.8%

Source: National Board of Chiropractic Examiners

 

Expenses as a Percentage of Sales

Cost Of Goods	6% to 15%
Payroll/Labor Costs	20% to 30%%
Occupancy Costs	11%
Profit (pretax)	25% to 35%

 

Industry Trend

“Up as boomers’ health deteriorates”

 

Advantages

• “Less training required than other doctorates.”
• “Low cost of entry; not much capital equipment needed”

 

Disadvantages

 

• “High competition in many areas; changing regulatory/insurance/tort reform environment in many states negatively impacting practice revenues”

 

Additional Resources

 

 

Trade Publications

 

• Today’sChiropractic
• Chiropractic Economics

 

Associations

 

• AmericanChiropractic Association
• National Board of Chiropractic Examiners—an excellent site

 

 

______________________________________________________

2009 BUSINESS REFERENCE GUIDE

The 2009 Business Reference Guide offers you over 750 pages of up-to-date rules of thumb and pricing information for over 650 types of businesses, plus an extensive list of Industry Experts.

3 Options for Purchasing

2009 Business Reference Guide………………..$120
(to order go to bbpinc.com/brg)

For the most up-to-date information throughout the year, order the 2009 Reference Guide with BRG Online, offering online accessibility, keyword searching and continual updates throughout the year.

2009 BRG Online Access………………..$149
(to order go to bbpinc.com/brgonline)

2009 Business Reference Guide PLUS one-year access to BRG Online………………..$247
(to order go to bbpinc.com/brgonline)

 

A recent survey (September 2008) conducted by businessesforsale.com – a leading international listing site – revealed the following about the current economic situation and its impact on business brokerage.

Seller financing is not the only issue to have come out of the economic slowdown. Brokers reported the following common issues:

• Sales are harder to complete when there is no real estate attached to the business.
• There are more corporate buyers investing in smaller businesses.
• Buyers are using lack of financing as an excuse to make lower offers.
• There is a lot more caution in the marketplace.
• Sellers have nowhere to re-invest the money from a sale.
• It’s generally harder to find financing, particularly to get an SBA loan. Application processes are longer and credit is tightened.
• Smaller deals are not completing.

Overall Market Activity
Businesses are still being sold; however, 50% of brokers believe the process is taking longer than it did last year. On average it takes 12 months for a buyer to be found and a deal to complete – 3 months longer than this time last year. 12.7% of brokers believe there has been no change in the length of the business sales cycle.

Comment: In addition, at the recent International Business Brokers Association conference, we heard quite a few stories of deals that fell apart primarily due to financing. The loans couldn’t be obtained, the business didn’t pass muster with the bank, or the bank just plain wouldn’t even consider the loan. Most of these were SBA loans. On the flip side, quite a few attendees said they were making deals, especially on smaller businesses.

Some of the common issues listed above are fairly obvious, but others deserve some discussion. We suspect that the deals with real estate involved are easier to get financed than those without it. Real estate always has intrinsic value, so banks and SBA (7a) loans are much easier to obtain with real estate included as security.

We also think that corporate buyers (by this we mean buyers who worked in the corporate world who we assume have been let go) are looking at smaller or less expensive businesses because they can’t get home equity loans or they can’t get them for nearly as much as they had hoped. This is then coupled with the lack of available financing mentioned previously.

We find it interesting that buyers are making lower offers using the lack of financing as an excuse. We would have thought that the opposite would happen. Sellers generally look for a higher price if they are financing the sale. Outside financing usually results in an all-cash sale or pretty close to it. Cash generally commands a lower price than one that is seller financed. As an aside, we feel that the current economic situation will create a lot of first-time buyers due to the layoffs and downsizing being done by corporate America.

Today’s buyer is probably a lot more cautious due to the current economic times. Money is tight and there is a lack of available financing, forcing buyers to use their own capital or what they can borrow on their home equity. Since the majority of them are first-timers, they are cautious – and scared. Business brokers have to take this into consideration when working with them.

Now, more than ever, there is no such thing as too much information. Not only as much financial data as possible is necessary, but seller training, operations manuals, key employees who will stay, and seller financing are critical. Remember, seller financing is also a big confidence builder. Buyers feel that if the seller is financing the sale, he or she must be confident that the business can not only afford the payments, but also provide a livelihood for a buyer. It’s also important that the landlord is agreeable to the sale; that a franchisor is reasonable about transferring the franchise to a new buyer, etc. In other words, the preparation is all important. A snag, such as an uncooperative seller, landlord, or note holder, can scare off a first-time buyer who is already petrified about depending on a small business to support his or her family.

It is also very important that we brokers sell the small business lifestyle; the fact that an owner can’t be fired, there is always cash flow, and that most businesses have a great upside with new management. Numbers are important, but lifestyle and owning your own business are key selling points today!

Smaller deals are probably not closing because the buyer is afraid to make the leap of faith necessary to become a small business owner. In today’s environment, business brokers must spend time with a buyer and delve into whether he or she has what it takes to make that leap of faith. Sellers also have to be educated on how serious they are about selling. Many sellers back out of a sale when it dawns on them that they now not only won’t have anything to do, but they won’t have an income – unless they are providing seller financing. There is a very old and trite adage: A successful sale of a business requires a willing seller and a willing buyer. That is more necessary today than ever.

Following is a brief article from a very successful business broker’s newsletter. His name and company are at the end of it. We are doing it this way to emphasize the title of the article: Valuation in the Volatile World.

Business buyers are buying the future income stream or profits of a business.

Historic results are no guarantee of future performance. Financial statements will show past profits and trends but cannot tell you what will happen next year.

Averaging figures for the last 3 or 4 years can be dangerously misleading, particularly if the business is experiencing a decline in the present downturn. The most recent results are the best indicator of the future, but the appraiser has to make a subjective judgment as to what the future really holds.

The current recession may well be deeper and longer than many anticipate. But the economy will rebound eventually and many businesses will emerge leaner, meaner and stronger from the experience. After every bust there is a boom.

The challenge for the appraiser is to guesstimate the future performance of the company, how much the downturn will impact results, and how much prices will be supported by the increased supply of buyers as unemployment rises.

Business valuation is never a precise science. All valuations are opinions and the only true test of value is an arms-length sale in the market-place after a thorough marketing program.

Clyth MacLeod, Clyth MacLeod Limited, Auckland, New Zealand

With the current economic downturn, we should see buyers who have lost their jobs, for whatever reason, searching for a way to support themselves and their families. Many will hope to find new jobs; others will decide to look at going into business for themselves. From this second group, some will start from scratch, others will investigate franchising, and still others will look to buy an existing business.

The most recent survey conducted by Business Brokerage Press revealed that seller financing was involved in only 27 percent of the transactions. SBA financing was involved in 30 percent, bank financing in 20 percent and 23 percent by “other.” Interestingly, when asked what the main obstacle was that prevented sales from closing, financing topped the list at 30 percent. This was the biggest reason for deals not closing.

Many of the buyers considering buying a business to replace a lost job may not be candidates for outside financing. They may be scraping every dollar they can for a down payment and money to live on until they find a business and receive an income from it. Others may not have sufficient experience for SBA or other financing; the business itself may not qualify due to lack of assets – such as a service business. The reasons are endless.
As you will see from the statement below, SBA qualifications are tightening up. It never fails — the economy is tanking and the first thing the government does is tighten up SBA lending, when what it should be doing is loosening requirements and increasing the annual amount that SBA will guarantee. The more small businesses there are, the greater the increase in jobs.

In order to maintain deal flow, seller financing is going to be absolutely necessary. Certainly, SBA and other financing will be available for those really good deals and the really qualified buyers. However, there will be many deals that may have qualified for outside financing some months ago that won’t qualify today, unless requirements are lowered.

No sense in promising outside financing in today’s market. Sellers must be told from the outset that they will have to provide the financing if they hope to sell their business.

The following statement was issued by Anthony Saya, (315-345-1238) a representative of the commercial lending department of Key Bank, a major bank.
_____________________________________

Business Acquisition Financing & New SBA Policies

Buyer’s Down Payment: If any of the buyer’s down payment is coming from borrowed funds, such as home equity, the borrower and/or his family living in the same household must have outside income to meet the credit obligation for those funds.

Business Valuations: All business acquisitions require a business valuation. If the loan proceeds are less than $350,000, the valuation report may be prepared by the lender. The lender may not use a report provided by the buyer and/or seller and the lender must order this valuation.

If the business contract gives specific value to assets (not real estate) and the business financial balance sheet indicates a value less than on the contract, an independent appraisal for those assets must be obtained to support the higher valuation. The lender may not use a report provided by the buyer and/or seller and the lender must order this valuation.

Seller Financing: SBA states that the lender should explore seller financing for the goodwill portion of a business acquisition. A seller’s refusal to provide subordinate financing for the goodwill should be documented in writing by the seller and provided to the lender. SBA is expecting lenders to use prudent lending decisions when determining to provide financing without the seller’s participation.

Loan Terms: Business acquisitions with no real estate remain at a 10-year term. Real estate acquisitions remain at a 25-year term. Historically, loans that included both business and real estate were blended. Lender’s now have the option of providing a blended maturity or a maturity based on the maximum maturity allowed for the asset comprising the largest portion of the use of loan proceeds. For example, if the majority of loan proceeds are financing real estate, a maximum term of 25 years is allowed. Verify with the lender what method will be used to determine the maturity.

Life Insurance: If the business management is tied to an individual or a group of individuals, life insurance is required. The amount of life insurance is to be determined by the lender taking into consideration the type of collateral and the liquidation value of the collateral.

Gas stations: The property may not have any contamination above state and federal regulation. Any and all levels above the minimum allowed by state and federal regulations must be cleaned up and reported as such before loan can be approved. If the level is in the acceptable range, however some reasonable clean up or monitoring remains, the financial means to make that happen need to be addressed and be satisfactory going forward. Loan proceeds are not to be used for this ongoing clean up and/or monitoring.

The seller and the buyer must sign an SBA Environmental Indemnification Agreement without revisions. The seller’s liability under the Indemnification Agreement is only up to the time period when the property is transferred. The fuel supply company does not sign this agreement unless it is the seller or the party responsible for on going clean up and/or monitoring.

Fuel Supply Agreement must not have any controls of the business management or an automatic purchase agreement at the end of agreement.

The real estate property title must not have any unreasonable covenants/deed restrictions that would prevent the lender from liquidating and selling the collateral, other than normal municipality zoning rules.

Lender must have the following in advance to make loan approval: Property Title Policy; Environmental Report; Tank & Line Pressure Testing; Real Estate Appraisal; Fuel Supply Agreement.

Lender Referral Fees: When a referral fee is paid by a lender or a borrower, this must be disclosed on a SBA 159 Compensation Form disclosing the actual fee which the borrower, Lender, and referral agent must all sign. If the fee exceeds $2500, an itemized invoice is required. A lender and borrower cannot both pay a referral fee for the same transaction. A borrower can pay a packaging fee and a lender can pay a referral fee on the same transaction.

Seller has existing SBA Loan: If a lender has an existing SBA loan to the seller and is financing the acquisition, the lender may not process the request through any expedited loan program. The request must be submitted to the SBA Loan Processing Center for final approval.

Collateral: SBA no longer allows lenders to provide a value to accounts receivable and inventory when determining collateral coverage, even if those assets are required as collateral on term loans.

The following list was updated for the 2009 Business Reference Guide and the Business Reference Guide Online, which is continually updated.

Remember, that Rules of Thumb are just that, but will provide a quick “ballpark” idea of what these various food and drink businesses might sell for.

Bagels
30% to 35% of annual sales

Read the rest of this entry »

This article is about an actual court case, Business Consulting Services d/b/a Hawkeye Business Brokers, v. Leroy Wicks, 703 N.W.2d 427 (Iowa 2005), and the resulting decision between a business broker (and her firm) and a seller who refused to pay a commission. The seller’s main defense was whether a clause in the firm’s listing agreement was valid, but more importantly whether she, the broker, fulfilled the terms of the agreement and the clause in question. Whether she fulfilled the terms of the agreement brings into question the very important, but often overlooked definition of “Procuring Clause.”

Most listing agreements used by business brokers contain what is termed an “extension agreement” or a “safety clause.” Many of them read as follows:

“Seller agrees to pay the full commission set forth in this Agreement to the Broker in the event the property described herein is within one year after the termination of this Agreement, sold, traded or otherwise conveyed to anyone referred to Seller by the Broker or with whom Seller had negotiations during the term of this Agreement.”

In this case, citing Mellos v. Silverman, 367 So.2d 1369, 1371 n. 1 (Ala.1979), defined procuring cause as:

“Procuring cause refers to a cause originating with a series of events which without break in their continuity result in procuring a purchaser ready, willing and able to buy on the owner’s terms.”

In Chapman Co. v. Western Nebraska Broadcasting, 213 Neb. 322, 329 N.W.2d 107 (1983), the court noted that the requirement for a causal connection was the clear majority rule. Another source, discussing cases from several jurisdictions, notes:

[I]n order for a broker to be entitled to a commission, under and in accordance with an extension clause, he must ordinarily be able to establish at least some causal connection between his actions and efforts in regard or relation to the listed property and the ultimate purchaser thereof, and with the sale eventually made to such purchaser.”

The court in Business Consulting went on to add:

“We adopt the majority rule and hold that a broker seeking to recover under an extension clause must establish some causal connection between the broker’s efforts and the eventual sale. This might include negotiations between the parties or actual assistance in the closing of the sale. In this case, Hawkeye [the business brokerage firm involved] has not shown it was involved in any negotiations or the closing of the sale. As the Nebraska court said in Chapman, a rule that would allow recovery for merely soliciting a buyer without requiring a causal connection with the sale would burden the owner’s right to dispose of his property. 329 N.W.2d at 111. We agree, and we also believe it would be poor public policy to reward brokers who, through such mailings or other forms of mass communication, would receive a substantial commission without diligent effort toward the conclusion of a sale. While the broker in this case did not mass mail to prospects, but rather, limited her contacts to six possible buyers, the point remains that “referring,” as the broker did in this case, without more, is insufficient. As the court observed in Patterson v. Blair, 123 Utah 216, 257 P.2d 944 (1953), …

“*432 although the clause with which we are concerned is perfectly valid and to be invoked for the broker’s protection in a proper case, it surely was not intended to benefit a real estate man who has done nothing, by conferring upon him a “windfall” commission because he casually or inadvertently mentioned the listing to someone who thereafter happened to purchase it in the normal course of affairs and quite independent of the broker’s activities. If so, he might well content himself with letting everyone possible know of a listing in the hope that some such eventuality would inure to his benefit, instead of really working on selling the property.

“Patterson, 257 P.2d at 946. The plaintiff has failed to establish a causal connection between its referral of the buyer and the ultimate sale. We therefore reverse the judgment of the district court and remand for dismissal of the plaintiff’s petition.”

Comment: As can be seen from the above decision, the business broker lost the case. Procuring cause was the culprit. The court didn’t seem to have any problem with the extension agreement, but rather with the fact that the business broker really didn’t do anything but refer the buyer to the seller and the business – not enough in the court’s opinion to be entitled to a commission.

Here are some thoughts on how to avoid this:

It’s important that you keep written records of your dealings with buyers. You never know when a deal will take place without your knowledge. And, as veteran business brokers well know, it does happen. Your records should include times, dates and a summary of what happened. Be sure to include telephone conversations with dates, times and a brief description of the call.

All emails (both incoming and outgoing) should be kept. The more evidence you can provide demonstrating that you did more than just refer the buyer or that your role in the sale was more than casual, the better chance you have of evidencing procuring cause. In fact, the seller’s attorney might take a look at the broker’s work copy and decide to try to settle the case rather than pursue a court fight.

Another suggestion is to take a look at BBP’s Dealtrax program. It is a management program designed specifically for business brokers, and one of its features is that it can build and maintain a computerized record of ongoing buyer contacts. For more information visit www.bbpinc.com.

Reuters

Published: Friday, August 15, 2008

NEW YORK - Cookie retailer Mrs. Fields Famous Brands is running out of dough and plans to file for Chapter 11 bankruptcy protection.

The company, which licenses and franchises some 1,200 Mrs. Fields Cookies and TCBY frozen yogurt locations worldwide, plans to continue in business as it seeks to re-organize, according to a Friday filing with the U.S. Securities and Exchange Commission.

Mrs. Fields, based in Salt Lake City, Utah, was started in 1977 by Debbi Fields, a young mother who made cookies from scratch at her first location in Palo Alto, Calif.

The company began franchising stores in 1990 and in 2000 it gained control of TCBY, which stands for “The Country’s Best Yogurt,” through a $140 million cash buyout.

The company has struggled with declining sales throughout the past year as have many U.S. restaurant and food companies as higher gasoline prices and rising ingredient costs have eroded sales and profits.

AM&AA Licensure Task Force
Position Statement & Summary of Key Activities

After careful study of the confusing and complex layers of state and federal laws and regulations that regulate the securities-related activities of an M&A Advisor/Intermediary, the AM&AA has concluded that there is an urgent need to clarify and, if possible, simplify this situation for the greater benefit of its members and the profession; for the legion of small- to medium-sized businesses that make up 86% of the US Gross National Product and are so important to the US economy; and last but not least, the general public. To this end, the AM&AA is fully supportive of three, separate but related initiatives:

First, AM&AA fully supports the adoption of a new class of Private Placement Broker (PPB), as recommended by the ABA Task Force, that is expected to enable M&A firms to:

• Raise capital from qualified investors, (e.g., high net worth individuals and qualified entities),
• Fully participate in advising, negotiating and structuring private securities offerings,
• Operate in a simplified regulated environment with a lower setup cost and at a lower annual operating cost each year, and
• Share fees with other registered broker-dealers.

In reality, most of the heavy lifting for this proposal has already been accomplished. Approximately a dozen attorneys from nearly as many law firms labored for over 6 years to thoroughly study the issue, draft the current PPB proposal, and submit their study and recommendation to the Securities and Exchange Commission (SEC) and North American Securities Administrators Association (NASAA). The ABA Task Force’s whitepaper can be obtained from the AM&AA’s website at: http://www.amaaonline.org/docs/ABATaskForceReport%201-04-07.pdf.

What remains to be done on this initiative is:

(1) Communicate our support for the
ABA’s PPB proposal with the various federal and state regulatory agencies,

(2) Monitor the development of this proposal through the various federal and state agencies and the Financial Industry Regulatory Authority (”FINRA” f/k/a NASD), consistent with the original ABA Task Force recommendation, and

(3) Coordinate with the ABA Task Force as required on any revisions/changes to their proposal to ensure that our interest is considered/protected as much as possible.

Second, AM&AA has developed, proposed, and fully supports the creation and adoption of federal and state regulations creating a new system of limited state-level registration and regulation for M&A brokers (the M&AB proposal), which would allow an M&A firm to:

• Assist in the sale/purchase of a business, regardless of size or ultimate deal structure,
• List and publicly advertise the business itself for sale,
• Advise and assist in valuing the business (but not its securities in a market or an offering),
• Negotiate price and terms of sale,
• Advertise itself as a “State Registered M&A Broker or Advisor,”
• Receive compensation from commercial lenders and third-party service providers for fully disclosed referrals, and
• If approved by FINRA, receive referral fees from registered broker-dealers.

The proposed simplified regulations would require the M&A firm to:

• Disclose background information about the M&A firm, its professionals, and their credentials,
• Describe, in writing, the terms and conditions of the engagement,
• Disclose conflicts of interest,
• Annually file a simplified registration in its home state(s),
• When conducting business in other states, file a copy of the home-state registration,
• Maintain simplified books and records related to these activities.

The proposed regulations would prohibit:

• Conduct that is fraudulent, unlawful, or unethical under today’s professional standards,
• Discretionary authority to close a transaction on behalf of client,
• Any involvement with raising capital to invest in or buy a business, and
• Any holding, handling, or possessing the parties’ funds or securities.

AM&AA has done most of the heavy lifting on this initiative, since the proposal did
not exist at the time we undertook this initiative. However, since retaining Hugh Makens and Shane Hansen and their firm, Warner, Norcross & Judd in late August 2006, we have accomplished a lot in less than two years. Our accomplishments to date and next steps will be discussed in more detail below.

Third, working in close collaboration with IBBA, we have developed, proposed, and fully support the adoption of federal and state rules codifying the no-action letter issued by the SEC to a business broker, Country Business, Inc., on November 8, 2006, creating a well-defined limited exemption from federal and state broker-dealer registration and regulation for Main Street business brokers when a transaction starts as an asset sale but is closed as a stock sale. This proposed rule is labeled: The Small Business Sale Transaction Exemption, and was included as part of the updated and revised M&AB proposal which was jointly presented to the SEC senior staff and the NASAA Special Project on Finders on April1, 2008.

Source: Alliance of Merger & Acquisition Advisors. This is an excellent association to join for all M&A professionals. For more information go to: www.amaaonline.org

Note: For additional information on this important subject subscribe to the Business Broker magazine online: www.thebusinessbroker.com

1. Have financial statements audited.

2. Try to reach the magic number of $1mm in EBITDA and thereafter earn as much money as possible. For companies over $10 million in sales, try to exceed $1mm in EBITDA.

3. Justify the add-backs and/or adjusted earnings.

4. Clean-up the balance sheet, i.e., stockholders, pay-off loans, write-off obsolete inventory and uncollectable A/R’s, sell off non-producing assets such as slow-moving or dead inventory as the buyer’s due diligence team will identify them anyway.

Dividend-out extra cash not necessary for working capital and liquidate stocks, bonds, etc. that are not associated with the company being sold.

5. Prepare financial projections 1-2 years out.

6. Receive fair market value appraisal of real estate (if owned) and M&E.

7. Have key employees sign non-compete and maybe have “stay-agreement” in place. Maybe promote key officers as full management team in place. Whatever relationships such as sales representatives agreements, key employees, landlords, vendors’ orders, customers’ purchase, etc. that should be formalized, do so for purposes of institutionalizing the business. Examine long-term contracts either to renegotiate the terms or extend these contracts if it is favorable.

8. Organize company records, i.e., minutes, BOD meetings, etc.

9. Settle any and all legal threats by customers, vendors, or employees that have not yet materialized.

10. Set up a War Room whereby various documents pertaining to the business will be accumulated in one specific place.

11. Consult with your attorney and/or other advisors for tax planning, generation planning, wealth management planning, etc.

12. Select an investment banker well in advance so that you will have their opinion of a range of valuation to expect from the potential buyers.

13. “Begin with the end in mind” is an expression that means one should estimate the selling price and then factor in all the deductions including capital gains tax, transaction costs and in some cases severance costs to determine the net proceeds, then divided by the respected ownership to determine if the net amount will be acceptable.

14. Clean-up the office and facilities.

Source: Selling Middle-Market Businesses: A Guidebook for Intermediaries. For your copy of this informative book go to: www.bbpinc.com

Over 450 BV firms have submitted financial and operational data for the 2008-2009 edition of the Business Valuation Firm Economics & Best Practices Survey (due out in early September). Of these, an amazing 12% performed their first appraisal in the last twelve months. (This is an even a higher growth rate than in the last survey 18 months ago, in which 9.4% of respondents had opened their doors in the preceding year). Many reactions to this growth are possible. For certain, one response is pride since business valuation is growing at a faster rate than any other major profession, including legal, medical and accounting. From a business point of view, however, practitioners need to manage this influx of new “competitors.” A more crowded space means that issues like “brand” and “niche specialization” will be ever more important going forward.

A Response to Growth

After last week’s BVWire leaked some preliminary results from the 2008-2009 Business Valuation Firm Economics & Best Practices Survey—specifically noting the exponential growth in the BV industry—we received some feedback from our readers. CFO Ken Becker, CMA, CPA (Portland, OR) commented, “With the accounting profession moving from historical cost basis to current value, it would be surprising if the BV field was not growing quickly. The challenge for the BV profession must be to maintain quality during rapid growth.” Good observation. Quality is important and is something the AICPA’s SSVS 1, NACVA’s revision to their standards, and the ASA’s latest version of USPAP (all effective January 1, 2008) all push towards. Have comments? Send them to BVWire@BVResources.com.
Source: BVWire – July 16 & 23, 2008 BV Resources, Business.com, Business Valuation Resources

Comment: It is apparent that the business valuation profession is growing rapidly. And, we assume that the above reported growth is just among those that receive the BV Wire emails from BVResources. It doesn’t include those who practice business valuation, in some form, and don’t receive these emails. We also assume that it doesn’t include those practitioners who perform business valuation as part of other business services they may provide. Anyone doing business valuations, for any reason or purpose should understand the responsibility (and yes, possible liability) they assume for their work. The bigger the business, the more reasons there may be for using a third party resource.