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7 Ways TrumpCare Will Change Healthcare Industry

7 Ways TrumpCare Will Change the Healthcare Industry in 2017

At this point, only one thing is certain about TrumpCare: it’s going to happen. But what will it look like? At this point nobody knows, probably including even Trump himself.Concierge business brokerage and business valuation services to exceptional Dallas - Fort Worth business owners

Nevertheless, it’s possible to read the tea leaves via Trump’s appointments and statements that he and his appointees have made in the past. Based on this, there are seven likely developments:

  1. Block grants for Medicaid– President-elect Trump has already proposed significant tax cuts which will add to the pressure to reduce healthcare expense. The brunt of this effort is most likely to fall upon Medicaid, probably in the form of block grants to states rather than direct federal funding.
  1. More Emphasis on Measurement– Health insurers have long wanted to control costs by paying for results rather than activities, aka “value based reimbursement.” TrumpCare will probably require healthcare providers to submit additional paperwork to prove “demonstrated outcomes” before being paid.
  1. More Spending on Information Technology– Increased emphasis on cost control and outcomes will drive healthcare providers to use more technology and automation. Much of this will take the form of shifting clerical work (making appointments, handling insurance claims) onto patients.
  1. Less Government Regulation– Trump and GOP have identified over-regulation as a major source of unnecessary healthcare costs. As such, TrumpCare will likely include a reduction in regulation and reporting requirements, especially those promulgated during the Obama administration.
  1. Fewer Cost Controls for Physicians– The proposed Secretary of Health and Human Services (HHS), Tom Price, believes physicians should play a leadership role in all areas of healthcare, including reimbursement approaches outside of hospital settings. He can be expected to fight programs like the current Centers for Medicare and Medicaid Services (CMS) effort to bundle payments for cardio surgery.
  1. More Public/Private Partnerships– Some public/private demonstration programs, like the Independence At Home (IAH) in-home elder primary care project, have yielded good results for shared risk and profitability. It’s reasonable to assume that TrumpCare will embrace and expand such efforts.
  1. More Mergers and Acquisitions– Obamacare drove a wave of M+A activity as healthcare firms were forced to adapt to rapidly changing circumstances. TrumpCare is likely to create even more change, especially in parts of the healthcare market (mostly outside of hospitals) that are currently fragmented.

What Does This Mean for Your Industry Segment?

Our entire professional team believes that healthcare technology in all verticals will have more prominence, including revenue cycle management, outcome data measurement, and population analytics. The more integrated the technology is inside a healthcare company’s operations, the more it will increase the company’s valuation.

There are other factors that will affect healthcare company value, including the unfolding issue of minimum wage and the recently stayed increases in the exempt salary threshold advanced by DOL. These initiatives will have the greatest impact on labor-intensive services, which predominate in the healthcare marketplace.

Durable Medical Equipment (DME) and Medical Devices

“We have already undergone significant change with competitive bidding in the durable medical equipment (DME) market and there will be more to follow. Despite this there remain great opportunities and we have several good quality deals in our pipeline. In the medical device area, there will be very positive growth with the likelihood of a rollback on medical device taxes.”

— Bradley Smith, VERTESS Managing Director/Partner

Urgent Care Center (UCC), Ambulatory Surgery Centers (ASC), and Physician Practice

“Each of these areas continue to have strong investor interest, including private equity, and fit well with the focus on cost control. It appears that reimbursement will increasingly support more services in outpatient environments that are attractive for physician entrepreneurs. The markets will continue to expand even as they consolidate through increased M+A activity.”

— Luis de la Prida, VERTESS Managing Director

Pharmaceuticals and Contract Research Organizations (CROs)

“There are many exciting developments in all of these bioscience verticals and, despite the specter of TrumpCare, pharma’s shares have skyrocketed. I foresee strong growth in 2017 and beyond.”

— Teresa Gonzalo, VERTESS Managing Director

Homecare/Hospice, Intellectual/Developmental Disabilities (I/DD), and Addiction Treatment

“The value of programs will be maintained in 2017, with the possibility of some increases as consolidation ramps up in all areas, including nonprofits. While the I/DD market is experiencing more managed care reimbursement pressure, there remains a broad, politically agnostic base of support across the US.”

— Tom Schramski, VERTESS Managing Partner

The Bottom Line on TrumpCare

This is not a time to “hunker down and hope for the best.” Quite the contrary, TrumpCare will drive massive change in the healthcare industry. In order to survive and thrive, you will need to:

  1. Remain Alert. Once things start happening, they’ll happen very quickly. You’ll want to stay atop the news for the healthcare industry in general and your segment in particular.
  2. Become Flexible. To become more agile, you must fully understand your business — especially your financial and operational strengths and weaknesses. If you find this effort too daunting, a healthcare specialist advisor can advise you on how to better assess your current position.
  3. Focus on Building Sustainable Value. Regardless of what happens, the healthcare companies that focus on the basics will perform better than those that neglect them. 

Megabite Restaurant Brokers helps you value, sell, broker or buy restaurants, bars, nightclubs - restaurant valuations - restaurant appraisalsFor more information, Contact Megabite Restaurant Brokers, LLC
Phone: (817) 467-2161
www.megabite-rb.com 

How can Megabite Restaurant Brokers sell your restaurant, bar or nightclub business? You can discreetly and confidentially contact a broker at Contact Us, read other testimonials at Client Testimonials, search buyers at SEARCH OUR BUYERS or research more info here if you just want to understand how to SELL A BUSINESS.

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Scalable Niche Upscale Casual Deep Ellum Restaurant for Sale

Megabite Restaurant Brokers helps you value, sell, broker or buy restaurants, bars, nightclubs - restaurant valuations - restaurant appraisalsMegaBite Restaurant Brokers LLC offers, for your ownership consideration, a niche casual upscale restaurant bar serving foodies and food socialites. Located in the heart of Deep Ellum, the business is an exciting, highly awarded and dynamic concept that regularly challenges the status quo. The culinary team creates customer excitement and marketing zest, buzz and attention.  The restaurant is surrounded by paid (and some free) parking and has easy access to bus stops and DART rail. Deep Ellum is best known for its music scene, eclectic roots and rich history; it is a popular residential community and dining/entertainment destination.

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Why Banks Ask for a Personal Guarantee Before a Loan

Why Banks Ask for a Personal Guarantee Before a Loan

It’s a common scenario: You have a thriving business, and it’s doing so well that you believe it’s time to expand. That expansion requires more money, and, of course, increases your risk of failure. But you have studied your options, talked with advisors, and everyone agrees it’s a smart and potentially lucrative move.

Your bank has been there with you from the start. They know you, your integrity, and the way you run your business. So when your bank requests a personal guarantee to borrow money for your business, it can be upsetting. Why do they need a personal guarantee on this loan? Is it a reflection of the bank’s assessment of my business or my plans? Does it mean the bank doesn’t think my business is worth the risk?

The quick answer to all of those questions is no. It’s common for banks to request a personal guarantee before making small business loans. It’s reassurance that you, the business owner, are willing to assume more risk to assure your business’ success.

It’s Not Personal

Personal guarantees on loans to small businesses (i.e., businesses with valuation of up to $25 million), while typically required, became the norm as states enacted legislation introducing new corporate structure options such as the limited liability company or LLC. Unlike a sole proprietorship or general partnership structure, the LLC shields owners and investors from personal financial responsibility for the business’ debt.

The advent and popularity of the LLC among small business owners prompted bankers to definitely require personal guarantees from owners.

“It’s understandable that you want to limit your liability, but we have to ensure the owner stays very involved and engaged. He or she is the key figure, and the most valuable asset of the business, and as the bank, we want to keep the owner motivated and involved,” says BBVA Compass Director of Credit Risk – Small Business David Peacock.

At most small businesses, the owner is the CEO, the face, and the visionary of the business. The owner knows the customers and vendors, the employees and community, and the opportunities and risks.

If a small business defaults on a bank loan, it’s difficult to find another CEO with the needed specific skill set that the bank can hire to keep the business going, says Tommy Crawford, Director of Business Loan Underwriting at BBVA Compass.

“The CEO is absolutely the key to the success of the business, and a personal guarantee increases my confidence in the CEO and in the company,” Crawford says.

SBA Loans Require Guarantees

Personal guarantees are required by some government-backed loans. For all SBA loans, personal guaranties are required from every owner of 20 percent or more of the business, as well as from other individuals who hold key management positions.

BBVA Compass typically requires an unlimited personal guarantee from an owner or CEO, which provides additional protection to the bank for collecting existing and future debts, says Credit Manager David Battles. In some cases, where ownership is dispersed among a number of different owners — such as a large law firm or medical group, for instance — the bank will consider and sometimes accept a limited guarantee shared by all business partners, says Battles.

“In most cases, customers understand why the bank requires a guarantee,” says Battles. “They understand it’s simply a part of doing business.”

This article was written by Sherri Goodman.  Birmingham-based Sherri Goodman was a print journalist for 15 years, writing and editing for daily newspapers in Alabama, New Mexico, Georgia, and Utah, and The Associated Press in Texas and Georgia. She also has worked in media relations and communications for companies in the banking, energy, and automotive sectors. 


Megabite Restaurant Brokers helps you value, sell, broker or buy restaurants, bars, nightclubs - restaurant valuations - restaurant appraisalsFor more information, Contact Megabite Restaurant Brokers, LLC
Phone: (817) 467-2161
www.megabite-rb.com 

How can Megabite Restaurant Brokers sell your restaurant, bar or nightclub business? You can discreetly and confidentially contact a broker at Contact Us, read other testimonials at Client Testimonials, search buyers at SEARCH OUR BUYERS or research more info here if you just want to understand how to SELL A BUSINESS.

SBA Loans Tips

SBA Loans Tips – Do’s and Don’ts

Ready to grow your small business?

An SBA loan can help you accomplish your goal and may result in more favorable terms, such as a longer loan life and lower equity requirements. But because it is backed by the federal government, applicants need to be ready to play by the rules so that the process goes smoothly.

Daniel Walsh, Vice President and Senior Corporate Relationship Manager with BBVA Compass, offers these do’s and don’ts when it comes to applying for an SBA loan:

Do

  • Seek out an SBA preferred lender. The designation means the Small Business Administration has a comfort level with the lender and that matters, Walsh says. “It allows the lender to make a final credit decision without sending the request to the SBA for a decision. SBA preferred lenders have an earned level of confidence.”
  • “Have your documentation in order,” says Walsh. “There can’t be anything missing.” You should be ready to hand your loan officer three years of business financial statements and tax returns, a personal financial statement, a statement of personal history, your business plan, and articles of incorporation, if applicable.
  • Get your financial house in order. Make sure your financial statements include a profit and loss statement, projected financial statements, ownership and affiliations, business certificate/license, loan application history, business and personal income tax returns, your business lease, and résumés for all the principals.
  • Proactively explain unusual events and growth projections. Did your business suffer a dip in sales one year?  Spell out why and how it happened. Does your forecast include a dramatic jump of revenue? “Explain the reasoning behind your projections and your confidence level, says Walsh. “Don’t expect your banker to be able to fill in the blanks.”

Don’t

  • Rule out the SBA loan option. “Talk to a banker, check into it. A lot of times companies don’t realize they can qualify for it,” he says. Also some businesses may question whether the documentation requirements are worth the extra steps, even if they can qualify for a traditional loan. “If your business has been renting and you are thinking of buying, you could amortize that loan for 20 years with traditional financing. With an SBA loan, you could amortize it over 25 years, which helps improve month to month cash flow,” he says.
  • Balk at the request for a personal guarantee. “It’s 100 percent required,” says Walsh. “It’s reassurance that you, the business owner, are willing to assume more risk to assure your business’ success.”
  • Let the documentation requirements discourage you. “It’s a wonderful product that we can offer that provides much more flexibility and much less reporting requirements long term,” says Walsh. “While it may appear stringent up front, it is often well worth your while.”

This article was written by Sherri Goodman.  Birmingham-based Sherri Goodman was a print journalist for 15 years, writing and editing for daily newspapers in Alabama, New Mexico, Georgia, and Utah, and The Associated Press in Texas and Georgia. She also has worked in media relations and communications for companies in the banking, energy, and automotive sectors. 


Megabite Restaurant Brokers helps you value, sell, broker or buy restaurants, bars, nightclubs - restaurant valuations - restaurant appraisalsFor more information, Contact Megabite Restaurant Brokers, LLC
Phone: (817) 467-2161
www.megabite-rb.com 

How can Megabite Restaurant Brokers sell your restaurant, bar or nightclub business? You can discreetly and confidentially contact a broker at Contact Us, read other testimonials at Client Testimonials, search buyers at SEARCH OUR BUYERS or research more info here if you just want to understand how to SELL A BUSINESS.

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The location is popular for private events such as bachelorettes and birthday parties. The large outdoor patio is flexible offering food (eg bbq, smoker) and space options. The business day to day operations are overseen by the experienced general manager. The owner plans and oversees the promotional and event schedule (averages 15-20 hrs/wk). Many growth opportunities exist for a new owner especially through better promotion to both the LGBT and straight communities. The owner also feels that cosmetic updates will also improve the business (eg painting, bar facelift, …) estimated at $5,000-20,000.
The asking price for the assets of the business is $175,000 ALL CASH OR $200,000 with $100,000 cash down plus $100,000 seller financing to purchaser qualified/approved by the seller. The seller prefers ALL-CASH. The assets include inventory at cost of $6,500 and FFE (Furniture, Fixtures and Equipment) valued at $10,000.

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www.megabite-rb.com 

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2017 M&A Trends for Sellers

2017 M&A Trends for Sellers

For business owners, the New Year is an ideal time to reflect on long-term goals for your organization. A banker can provide valuable insight on trends in your industry and the market as a whole.

We talked to George Shea, Managing Partner at Focus Investment Bank, and Keith Dee, Founder and President of Osage Advisors, about a few of their insights for M&A going into 2017.

For those looking to explore a transaction in 2017, “my biggest advice is to begin thinking long before you execute, whether you do it on your own or hire an investment banker,” says Shea. “Make sure you have your financial house in order and understand the key metrics of your business — you should be able to slice and dice your financial information quickly and efficiently.”

3 M&A Insights

1. “Search funds have proliferated the lower middle market.”

Search funds typically comprise individuals who are looking to buy and then operate a company (usually one smaller in size than the typical target for a private equity firm). “There were a handful of search funds five years ago, and now they’re everywhere,” says Dee. “When a business does not fit the overall objectives of either a strategic buyer or private equity fund, search funds provide a viable option for owners looking to sell their businesses.

Promoted as part of top MBA programs, “they’ve become a generational trend for young entrepreneurs who want to buy a business and who have an investor base backing them up.” He notes that search funds tend to be conservative when it comes to valuations — he estimates 90% will be below strategics or even private equity — “because they will become the owner-operator of the business and have to go back and sell the deal to their investors who write the checks for them.”

2. “Private equity is going upstream.”  

“I’ve found equity investors are less interested in small add-ons unless they meet very stringent investment criteria,” says Dee, who typically works with companies between $1-$5 million in EBITDA.

“This is especially true for sub-$2 million deals, an area they were much more aggressive in a couple of years ago. With the money they’re raising now — half billion dollar funds vs. quarter billion dollar funds — it might not make sense as they are looking to deploy more capital per transaction.”

This may mean smaller companies looking to sell turn to strategic buyers, search funds, or independent sponsors (also on the rise).

3. “It’s still a seller’s market.”

We’re not at the peak of the seller’s market yet, according to Dee. “There’s so much money in the lower middle market, and even more being raised on the equity side. Equity investors and strategics alike are all looking for quality deal flow. It all comes back to supply and demand. It continues to be a seller’s market due to a short supply of quality companies, and I’m not sure when the pendulum will switch to a buyer’s market.”

“Timing is everything,” he adds. “You always want to be selling on an uptrend. You don’t have to be selling at the top of the market, but you do want to be selling on positive trends both in terms of sales and EBITDA.”

3 Industry Trends

1. “The precision machinery industry is hot.”

This is particularly true in the aerospace markets, says Dee. “We get a huge number of inquiries from buyers, both private equity and strategics, looking for aerospace-related businesses. The trend has been constant through 2017 and we expect it to continue into 2017.

“This is partly because large manufacturers like Boeing and GE are gearing up for big projects in the next 20 years. Just as important though is the human capital component — buyers are looking for talent. A highly skilled labor force is difficult to find right now. In addition, larger companies have reached capacity in their own facilities and are interested in acquiring smaller companies that may not be at full capacity.”

2. “Infrastructure, energy, and defense companies might want to wait and see on M&A.”

Dee predicts that due to the new presidential administration, “infrastructure, energy, and defense-related companies will likely see a bounce of work not next year, if not next year, certainly in 2018 or 2019. The question for sellers is, does it make sense to wait to see how it plays out? That’s a personal choice you have to make.” Dee notes that older business owners may be better off initiating a deal process rather than playing a waiting game. “If you’re a couple years older, you may find yourself in a more vulnerable position and there may be other concerns that come into play.”

3. “Buyers continue to reward recurring revenue in IT services businesses.”

“At every level of the IT services industry, buyers are rewarding recurring revenue. This is a global trend we’ve been seeing,” says Shea, who specializes in software and IT services companies. “Buyers are paying much higher premiums to companies that have shifted to recurring revenue vs. project-based.” 


Megabite Restaurant Brokers helps you value, sell, broker or buy restaurants, bars, nightclubs - restaurant valuations - restaurant appraisalsFor more information, Contact Megabite Restaurant Brokers, LLC
Phone: (817) 467-2161
www.megabite-rb.com 

How can Megabite Restaurant Brokers sell your restaurant, bar or nightclub business? You can discreetly and confidentially contact a broker at Contact Us, read other testimonials at Client Testimonials, search buyers at SEARCH OUR BUYERS or research more info here if you just want to understand how to SELL A BUSINESS.

Build Your Restaurant Exit Plan With Your Restaurant Buyer in Mind

Build Your Restaurant Exit Plan:  Build Your Business With Your Buyer in Mind

CEOs who have never sold a company before often take for granted that if they just focus on building value in their business, the rest will sort itself out. But even the shrewdest, most successful owner-operators can fail to realize this value if they are underprepared for the unavoidable eventuality of any business — an exit.

Investors rarely cut checks to companies when they cannot envision what an eventual exit will look like. Particularly for financial buyers (private equity firms, family offices, etc.) understanding when, how, and to whom they can sell is key in building a return profile for the business, determining a valuation, and ultimately, deciding whether or not to consummate the deal.

Gil Beyda, founder and managing partner at Genacast Ventures, a practiced entrepreneur and investor in early-stage technology companies, recently wrote what he dubbed a “love letter to CEOs,” asserting that companies — even the most promising ones — don’t simply sell themselves.

In his post, Gil suggests that CEOs should think not only about building value for their shareholders and employees but more specifically for the parties that could end up on the other side of a sale process.

Regardless of whether a sale is in the immediate horizon or several years down the road, start thinking of your eventual acquirer as a discrete entity for whom they are building value.

Thinking about the eventuality of the business is one of the first things Genacast does when considering an acquisition target. “When we do our diligence process, we ask ourselves and ask the company, who are your potential acquirers,” Gil says. If there isn’t an easy list to compile, some investors may take this as a signal that the dynamics of the business aren’t solid enough to warrant an investment.

So if investors and buyers are always thinking about the exit, even in the early stages of backing of acquiring a company, why shouldn’t an owner do the same? Here are a couple of ways to frame your thinking around building a business with a buyer in mind.

Understand the Why

The reason a company gets acquired depends on the specific buyer. Each prospective counterparty will have a unique set of characteristics they are looking for in a target company. It’s important to understand all of the different reasons your company may get acquired (for intellectual property owned by the company? For a hard to access customer base? For a highly skilled team?).

If you have a preferred buyer type in mind (based on your exit priorities) then focusing on the area of value that seems most relevant to them is one strategy to make the business increasingly attractive to that particular party.

Test the Waters

In Gil’s experience, some of the best acquisitions are born out of partnerships developed during the course of business. Conversations will evolve as a partnership becomes more successful and one company sees an opportunity to expand. “Few acquirers come from out of nowhere and make multi-million dollar offers to acquire companies with whom they have no previous relationship,” he writes.

Knowing this, you can be more proactive about developing such relationships. Which of your eventual buyers can you do business with today? If you believe your company could eventually be bought by a larger company, a distributor or supplier, or even a competitor, developing a mutually beneficial relationship before bringing your company to market may be the best way to test out synergies.

Get Your Name Out There

Many will stress the importance of engaging advisors and bankers early in the process for information on what other buyers and sellers are doing. Of course, the more intel you have, the better. But there’s another reason to strike up relationships with bankers in your space.

Helping intermediaries understand the nuances of the industry and allowing them some insight into how you are managing to take advantage of them will make it more likely that your company comes up during their conversations with other buyers and sellers in your market. The more you are talked about, the better: you never know what will pique a potential acquirer’s interest.


Megabite Restaurant Brokers helps you value, sell, broker or buy restaurants, bars, nightclubs - restaurant valuations - restaurant appraisalsFor more information, Contact Megabite Restaurant Brokers, LLC
Phone: (817) 467-2161
www.megabite-rb.com 

How can Megabite Restaurant Brokers sell your restaurant, bar or nightclub business? You can discreetly and confidentially contact a broker at Contact Us, read other testimonials at Client Testimonials, search buyers at SEARCH OUR BUYERS or research more info here if you just want to understand how to SELL A BUSINESS.

Avoid Unwanted Surprises During Due Diligence

Avoid Unwanted Surprises During Due Diligence

Potential buyers frequently uncover unwanted surprises during due diligence — resulting in downward purchase price negotiations, lower valuation multiples, lenders getting scared off, or the deal falling through.

In today’s economic climate, potential buyers are willing to search long and hard to identify the best acquisition candidate. Transparent financial and operating information is more important than ever.

For companies anticipating sale, sell-side due diligence can identify and quantify issues and exposures that could negatively impact a deal.

How Sell-Side Due Diligence Helps Sellers

According to a recent survey commissioned by BKD, 66% of closely held/family-owned businesses anticipate a change in ownership in the next 10 years. For would-be sellers looking to maximize value, it is prudent to begin preparing now.

Sell-side due diligence is a process in which a company hires a third-party expert to conduct a dry run diligence assessment. It usually covers areas such as financial statements, taxation, information systems, and operations.

The sell-side diligence process will assist companies in resolving or managing potential issues before potential buyers discover the problems on their own. To best position a company for a successful sale, we recommend beginning the sell-side diligence process one to three years in advance of the anticipated sale.

Here are a few specific ways in which sell-side due diligence can expose potential issues in advance of a transaction.

  • Make sure EBITDA addbacks are appropriate

To reduce the likelihood of purchase price disputes, sellers should take caution to make sure adjustments to restated EBITDA are appropriate and supported through proper documentation. For instance, a manufacturer who has leveraged process changes or purchasing practices to drive EBITDA growth needs to depict or model the actual run rate improvements that they should get full credit for. This should be supported by data that demonstrates throughput rate increases and purchase price decreases.

  • Avoid disputes around net working capital 

Unless clearly defined early in the process, target net working capital is another area commonly disputed during transaction negotiations. Purchase agreements frequently define closing net working capital computations as “consistently applied and in accordance with generally accepted accounting principles (GAAP).” Costly disputes can arise when a company consistently applies certain accounting policies that are not in accordance with GAAP, particularly at interim period-ends.

If as the seller, you haven’t followed GAAP “to the letter,” it’s often beneficial to address this with the buyer early in the process. For example, in a recent manufacturing deal we assisted on, the seller proactively defined the accounting methods he had used around valuation of inventory. With some effort, the buyer was able to get comfortable with inventory and the deal proceeded to close. Sell-side due diligence can identify GAAP departures early on to help ensure net working capital computations are clearly defined prior to the purchase agreement.

  • Develop meaningful analytical information to support valuation

Sell-side due diligence can help a company produce meaningful analytical information from its accounting system (i.e., gross margin by customer, product line, market segment, etc.). This supporting detail can help substantiate changes in historical EBITDA as well as model future performance (given varying assumptions).

In one recent deal, a manufacturer combined invoice details, purchasing data, and bill of materials to illustrate material margins at a customer and product level. Even before conducting due diligence, the buyer had a clear view to the drivers of changes in performance, and was able to focus on future opportunities among customers and products.

  • Uncover liability issues and exposures

In nearly every buy-side due diligence engagement, we have uncovered liability issues and exposures related to state tax compliance and nexus, many of which surprised the seller. These types of exposures are common in privately held companies and can frequently be addressed and mitigated in advance of going to market. State and local tax (SALT) due diligence can also identify savings opportunities by identifying potential tax reductions. Savings generated through reduced SALT payments effectively increase EBITDA, which can lead to increased company valuations.

  • Identify technology improvements to increase EBITDA

Information systems sell-side diligence focuses on identifying current technology capabilities, suggested improvement opportunities and internal controls while balancing investment demands and priorities. Operations sell-side diligence is a fact-based and metric-driven analysis to provide a company with potential improvement opportunities and cost saving suggestions, both of which could generate increased EBITDA.

Other situations where sell-side due diligence in advance of a sale process are beneficial include:

  • When the company has made one or more recent acquisitions and is presenting financial information on a pro forma basis, as if the acquisition(s) had occurred at the beginning of the period, and wants to present meaningful trend analysis
  • When the company is unaudited and complex GAAP accounting requirements (i.e., multiple deliverable revenue recognition) apply to its financial information
  • When the company records its financial statements on the cash basis of accounting, while buyers would require GAAP basis accrual financial information

In summary, sell-side due diligence provides companies with an objective third-party view from the buyer’s perspective and helps companies resolve issues before potential buyers discover them on their own. By engaging in sell-side due diligence several years out from a transaction, companies can avoid unwanted surprises and ensure a transaction runs as smoothly as possible.

This article was co-written by Monte McKee, Managing Director – Transaction Services at BKD and Chris Schumann, Managing Director at BKDnext. 


Megabite Restaurant Brokers helps you value, sell, broker or buy restaurants, bars, nightclubs - restaurant valuations - restaurant appraisalsFor more information, Contact Megabite Restaurant Brokers, LLC
Phone: (817) 467-2161
www.megabite-rb.com 

How can Megabite Restaurant Brokers sell your restaurant, bar or nightclub business? You can discreetly and confidentially contact a broker at Contact Us, read other testimonials at Client Testimonials, search buyers at SEARCH OUR BUYERS or research more info here if you just want to understand how to SELL A BUSINESS.

When Selling your Business, Should You Take an Earnout

When Selling your Business, Should You Take an Earnout?

An earnout is a common way to bridge the gap between a seller’s expectation of business value and a buyer’s willingness to pay. Earnout structure varies, but the basic idea is that a buyer will make additional payments to a seller post-close, dependent on the business achieving certain goals.

“When properly structured, earnouts can work — and when they work, they work really well,” noted Kenneth Sanginario, Founder of Corporate Value Metrics, during a recent panel at Axial Concord. But earnouts can also turn nightmarish in the case of misaligned expectations, unfriendly terms, and hidden stipulations.

“Earnouts for sellers who are going to exit are too often a disaster,” said Scott Hakala, Principal at ValueScope Inc. “The best earnouts incentivize the people who run the business. Earnouts for CEOs who are just standing back and collecting a paycheck often aren’t good. Sellers always believe they’re going to make the earnout, then are mad if they don’t.”

Giff Constable, Axial’s VP of Product, goes even further. He recently emerged from a rollup that included multiple earnouts. “The more independent you keep an acquired company, the easier it is to put an effective earnout in place. The more tightly you want to integrate the two companies, the more troublesome they become.”

When Earnouts Go Wrong

Careful legal wording can protect against bad behavior, but even this doesn’t always work. Hakala told a story of an exited owner with a 3-year earnout who watched from afar as the “buyer changed gears six months in and basically tanked the company.” He’s also seen rollups in which buyers deliberately credited the wrong business with sales in order to avoid paying an earnout.

Henry Heinerscheid, Director of PWP Growth Equity, said he tries to avoid earnouts even in cases where the CEO is staying on. “Earnouts can change the spirit of partnership between investors and management. It creates a misalignment of interests between the management team and other shareholders, which can lead to management making short-term decisions to try and maximize the earnout rather than trying to maximize shareholder value over the life of the investment.”

Hakala agreed, especially in the case of quickly growing companies with uncertain prospects. “An earnout can be a way to bridge the gap and divide up the risk. But there’s also an S curve where the more you grow, the harder it is to keep growing. There’s a time when your natural momentum will start tailing down. That can mean that earnouts or incentives that assume continued growth at the same rate as in the recent past may be unrealistic.”

Clawbacks and Earnout Alternatives

Hakala said he tends to prefer management incentive agreements over earnouts — “they’re more long-term and sustainable.” Incentive agreements should include assurances that if the company is acquired the owner won’t be terminated (or will receive severance if they are).

Another alternative to an earnout is a clawback, noted Sanginario. “With a clawback, the seller might accept a lower valuation but agree that if the company grows to a certain level, they can ‘claw back’ equity — maybe 10-15% of what they gave up in the transaction.” He said that the clawback can foster alignment between buyer and seller on a longer term basis than an earnout, though it has to be very carefully structured to avoid misunderstandings after the deal.

Advice for Sellers

If you do consider an earnout, it’s crucial to “put in protective provisions and to make sure it’s realistic,” said Hakala. Work with an investment banker and an experienced M&A lawyer to make sure that your interests are represented.

Dexter Braff, founder of healthcare specialist investment bank The Braff Group, had a few pieces of advice for CEOs considering an earnout:

  1. “Make sure you have a cumulative clause for multiple year earnouts. If you’re short in the first year, but way long in the second, you should still get your earnout for year one,” said Braff. “It shouldn’t be about when you earned it but about whether you earned it.”
  2. “Be wary of buyers factoring in basic risk of the industry into the earnout.” Said Braff, “the earnout is supposed to reflect things that aren’t covered in the current valuation. You don’t want the base valuation to get sucked up in the earnout and take on more risk than you need to.”
  3. “If possible, base the earnout on revenues, not EBITDA. The more calculations you have to do the more room there is for trouble,” said Braff.

Megabite Restaurant Brokers helps you value, sell, broker or buy restaurants, bars, nightclubs - restaurant valuations - restaurant appraisalsFor more information, Contact Megabite Restaurant Brokers, LLC
Phone: (817) 467-2161
www.megabite-rb.com 

How can Megabite Restaurant Brokers sell your restaurant, bar or nightclub business? You can discreetly and confidentially contact a broker at Contact Us, read other testimonials at Client Testimonials, search buyers at SEARCH OUR BUYERS or research more info here if you just want to understand how to SELL A BUSINESS.

Top 4 Missteps That Derail a Deal

Top 4 Missteps That Derail a Deal

Last year, 16% of the deals my firm represented on the sell-side required more than one offer before it finally closed. Those sellers experienced both the joy and the excitement of receiving an offer, but then the bitter disappointment of seeing the offer slipping away.

Deals fall apart for a variety of reasons. Some deals fall apart through no fault of the seller, and other deals fall apart due to completely avoidable misunderstandings.

Let’s look at a few common reasons that can cause a deal to blow up before the buyer and seller can sign on the dotted line.

There’s Really Only One Reason a Deal Falls Apart

We can come up with many reasons why deals disintegrate, but in reality there is only one reason for a deal to go south – mismanaged expectations.

I’ve often said that surprises are deal killers, but this isn’t entirely true. Good surprises certainly don’t derail acquisitions. But bad surprises are most certainly deal-breakers.

If a buyer makes an offer with a certain set of expectations, but later finds the reality to be different than their expectations, this is normally the reason that causes nearly every deal to break.

So as you prepare your business for sale, or as you go through the process of selling it, understand that you are engaged in a process of “setting expectations.” If you properly manage your buyer’s expectations, you’ll increase your chances of closing the deal.

Let’s look at some specific scenarios.

Forgetting to Disclose Elements In Your History

A few years ago, one of our advisors was helping a client sell his online business. He moved our client through the process of selling smoothly and without issue. It wasn’t long before a buyer was found and started doing his due diligence.

At the end of the due diligence period, however, the buyer discovered a previously undisclosed lawsuit. A few years back, our client was on the wrong end of a lawsuit, but when the buyer discovered this omission, it caused a ripple effect that eventually unraveled the deal.

The lawsuit itself was a non-issue. It was a frivolous lawsuit that the plaintiff quickly dropped. The problem was that it had been concealed.

It is not enough to simply disclose everything you are thinking of – you need to take stock of what you may have accidentally omitted and disclose that as well. Our client did not intentionally withhold information about the lawsuit from this buyer. He legitimately forgot it even happened since it was some years back and to him was a non-issue.

Remember to disclose everything, and take the time to identify anything you may have missed.

Recent Downturns in Financial Performance

It is all too common for a business to experience its worst financial performance during the week leading up to the closing. If the process of selling your business isn’t stressful enough for both you and the buyer, your business may decide to have a hiccup in sales, leading to doubt for everyone.

A downturn in your business shouldn’t come as a major surprise, however. Many CEOs say that selling their business was more work than actually running the business.

When you sell your business, you’ll be buried in negotiations, legal document reviews, running reports, and generating statements. Not only will your time be swallowed up whole during these stages, but your mental bandwidth will be completely consumed as well.

So you should plan ahead for this downturn as much as possible. Understand that your time will be in very high demand, and plan for late nights at the office and early mornings.

Most importantly, try to avoid major life changes. It never ceases to surprise me the number of sellers who sell their business during a move, city relocation, marriage, or birth of a child. One major life event is stressful enough. If you can avoid having two at the same time, it would be good for your sanity.

Opportunistic Vendors

As I said at the beginning of this article, not every deal falls apart because of something the seller does. In fact, I would say that less than half of the deals fall apart due to seller error. Some deals fall apart because of the vendors.

Even if you think that you do not have a special relationship with your vendor, your vendor may think otherwise.

I have been party to multiple transactions (two of which I was the buyer) in which a vendor tried to change their terms for the new buyer. Their explanation is always the same – the change in these terms was coming for the seller eventually. You just happened to step in at the time the change was pending. An unlikely story but how can you disprove it?

The reality is that some vendors are opportunistic, and some vendors are hesitant to offer the same grandfathered terms to a group they do not have a history with.

For example, I bought a content website years ago whose owner employed an outside company to sell advertisements. When I tried to negotiate a similar contract with the company, they wanted stronger commissions and a minimum term commitment. To them, I was a complete unknown, so they were not inclined to offer me perks.

Opportunistic vendors are a major barrier to getting a deal done. So you may want to consider contacting the vendor in advance about your intent to sell your business. Alternatively, you may want to research a backup option should any of your vendors choose to get greedy. Having a backup option will give you leverage to negotiate the same terms for your buyer.

If you are not comfortable talking to your vendors before a sale is guaranteed, just be sure to be present during this process. Having your presence during the transition will help in ensuring a smooth transfer.

Messy Processes

Over the years of owning your business, you have unconsciously developed habits, shortcuts, and efficiencies, many of which you may not even realize you do. A buyer, however, will notice these shortcuts.

If a buyer has trouble envisioning themselves in your role, or replacing your role, you will have difficulty closing the deal. Therefore, it is essential that you take the time to document your processes as much as possible.

Around one year before you sell your business, document your processes into standard operating procedures. Then match up your actual workflow to these SOPs. Modify them as needed.

Conclusion

Obviously, we always hope for every deal to proceed smoothly and close without a hitch. Unfortunately, life can sometimes throw a series of speed bumps in your way, which can complicate matters. But with the right amount of preparation, and the right mindset going into a negotiation, silly misunderstandings can be avoided, and you can close the deal in record time.


Megabite Restaurant Brokers helps you value, sell, broker or buy restaurants, bars, nightclubs - restaurant valuations - restaurant appraisalsFor more information, Contact Megabite Restaurant Brokers, LLC
Phone: (817) 467-2161
www.megabite-rb.com 

How can Megabite Restaurant Brokers sell your restaurant, bar or nightclub business? You can discreetly and confidentially contact a broker at Contact Us, read other testimonials at Client Testimonials, search buyers at SEARCH OUR BUYERS or research more info here if you just want to understand how to SELL A BUSINESS.