WhERE To FoCUS in 2011

January/February 2011 Volume 35, No. 1

WhERE To FoCUS in 2011ManagementPage 3

REMoVE RoADBloCkS To TiMEly CloSEPurchase, Sale and Valuation of CompaniesPage 4

Book REViEW: The Age of DeleverAgingProfessional DevelopmentPage 5

SoMEonE USing yoUR DoMAin nAME?legalPage 6

SElling A BiZ iS likE Joining A ClUBBusiness SalePage 7

Q&A: EMPloyEE CoMMiTS BiZ To UnWAnTED oBligATionlegalPage 8

ThE DiVERSiFiCATion iMPERATiVEinvestmentPage 8

DiVERSiFiCATion WiThin PRiVATE CoMPAnyManagementPage 9

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STATiSTiCAl DATA oF inTERESTPage 12

BEST oF The Business oWner BlogPage 13

2010 inDEX oF ARTiClESPage 14

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THE BUSINESS OWNER — EDITORIAL ADVISORY BOARDDavid L. Perkins, Jr. DL Perkins, LLC — President Managing Editor, The Business Owner [email protected]

Dr. Wen Chiang, Professor of Operations Management University of Tulsa College of Business FOCUS: Finance and Operations Management [email protected]

Laura C. Conway, Attorney at Law Porzio, Bromberg & Newman, P.C. FOCUS: Commercial and Insurance Coverage Litigation [email protected]

Dr. Jay Kent-Ferraro, Ph.D., President Empowerment Technologies, IncFOCUS: Executive Coaching • Performance-Based [email protected]

Bill Lohrey Lohrey & Associates FOCUS: Taxation and Tax Accounting • Tax Law [email protected]

Armand Paliotta, Attorney Hartzog Conger Cason & NevilleFOCUS: Tax Law • Securities Law • Business [email protected]

Jeffrey J. Presogna, CPA, CVA, President Presogna & Company FOCUS: Taxation • Capital Formation • Valuation

Neil M. Schaffer, CEO Longview Consulting Group FOCUS: Accelerating Growth in Emerging Companies [email protected]

Steven Soule, Attorney at LawHall, Estill, Hardwick, Gable, Golden & NelsonFOCUS: Bankruptcy Law • Debtor/Credit [email protected]

Jean Wilcox, CEO Cattle Logos FOCUS: Marketing and Advertising [email protected]

This publication is owned and published by DL Perkins, LLC, 5727 South Lewis Avenue, Suite 400, Tulsa, OK 74105 918-493-4900; Fax 918-493-4924 [email protected]

Stephanie Coit, Publisher [email protected]

David L. Perkins, Jr., Managing Editor [email protected]

Thomas Reynolds, Private Label Sales [email protected]

Ramona Gresham, Private Label Sales [email protected]

John Maybury, copyeditor and proofreader [email protected]

Kathy Piersall, graphic design [email protected]

Image credits: Cover ©iStockphoto.com/Mikey_Man; page 11 ©iStockphoto.com/athertoncustoms; page 13 © ImageZoo Illustration/Veer

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It’s a great time of year.

We are creatures of routine, of seasons and cycles. We need endings and new beginnings. Death and rebirth. 2010 is dead and gone. Whatever it was for you, it is now in the history books.

The new year brings both threat and opportunity. If 2010 was a successful year for you, don’t allow the success to lull you into thinking you don’t have to work as hard in 2011, or to cloud your view of what it will take for you to really succeed in 2011. Rather, assess 2010 objectively and address what must be done to make this coming year even better.

If 2010 was a struggle, put those struggles behind you and begin anew. Commit to the future and don’t live in the past. What has happened in the past lives only in the pages of history. It can enter our lives only by invitation. The only rational choice is for us to find value in every page of history. Glean lessons, strength, inspiration, and reason — and use them constructively in our effort to make the very most of our days ahead.

Here’s to a happy, healthy, prosperous and meaningful 2011.

From the Editor

David L. Perkins, Jr.Managing Editor The Business Owner Journal

Sincerely,

http://www.thebusinessowner.com/

The rigor and complexity of business today leave most owner-managers unsure where to focus their limited energies and resources. It’s as if blues guitar prodigy Joe Bonamassa were singing about business owner-ship when he growls, “So many roads, so many trains to ride.” But every once in a while, out of the confu-sion, a clear and compelling pathway comes into focus. Albert Einstein spoke of these moments of clarity. He said,

“When the solution is simple, God is answering.”

Are you looking for clarity about where to focus your energies this year, right now, or how to make your com-pany stronger and more successful? Here’s the answer: Reduce your operating costs and invest the savings in sales and marketing. Yes, it’s that simple.

Reduce Operating Costs

Your largest expense categories offer the most promise for expense reduction. For most companies, they are la-bor, occupancy expense and vehicles.

Overhead Labor Expense: Every dollar of salary and wage expense that does not bring in revenue is a burden. Burden must be continuously cut away. Technology and the ever-expanding buffet of out-sourced service options make it possible. And because it’s possible, it’s imperative. The competitive market-place means you’re in a race against your competition to adapt and to adopt more efficient means.

• Byreorganizingnecessarytasksthiswayorthat,canoneperson do the work you’ve been paying two to do?

• Canapart-timecontractorperformworkyou’vebeenpaying a full-time person to do?

• Canyouuseinexpensivetechnology—ortrainyourcus-tomers — to do some of the overhead task work for you?

Also, if you’re a baby boomer, your formative working years were marked by inflation. Annual, automatic pay raises for each employee became the norm. But infla-tion is no longer part of our economy. At least not today. Stick with your automatic annual pay raises, and you’ll simply transfer your profit to your employees.

Occupancy Expense: Every dollar spent on facilities is a profit dollar lost. Do you really need all that space? Do you really need that quality of space? Does the premium you pay over “C-class” space really aid your ability to earn a profit?

If you own space that is larger or of higher quality than you need, sell it or lease it to a user who can garner

higher utility from it than you (and therefore justify pay-ing a premium to you). For your own needs, buy or lease more economical space elsewhere. Now’s the time to reduce occupancy expense. Real estate val-ues are in the tank. Negotiating strength has shifted away from sellers and landlords to buyers and lessees. Get tough and lock in a deal that can save you big bucks for years to come.

Vehicle expense: Many owners and employees seem to think it’s important, or somehow re-quired, to have expensive cars and trucks. Does the qual-ity of your vehicles — or even whether you have them — really add value to your prod-uct or service? Cars and trucks are a terrible place to put your money. They lose 30% of their value in the first year — 95% over 10 years — and cost a bundle to operate, maintain and insure. If you deliver physical goods, consider doing what Michael Wasser-man does — use contract carriers.

Where to Invest Operating Cost Savings

The fount of life for your business is sales. More buyers of your goods and services are “out there.” You just need to expose them to you as a source, and teach them to buy from you. To do so, invest in your brand and create awareness by sending salespeople out to court and serve. It’s a conventional war. You need “boots on the ground.” Send as many as you can afford to recruit and equip. Reductions in overhead expense will allow you to afford more and equip more.

Are these suggestions divine providence? Well, one thing’s for sure — these suggestions are pretty simple.

Where to Focus in 2011M A n AG E M E n T

“When the solution is simple, God is answering.”

Albert Einstein

What operating cost are you decreasing in 2011? Visit nmea.thebusinessowner.com and leave a comment for this article — no logon required.

Every dollar of salary and wage expense that does not bring in revenue is a burden. Burden must be continuously cut away.

nmea.thebusinessowner.com 3THE BUSInESS OWnER JAnUARy/FEBRUARy 2011



Many slam-dunk deals are derailed by latent defects uncovered during due diligence.

4 THE BUSInESS OWnER JAnUARy/FEBRUARy 2011 nmea.thebusinessowner.com

The biggest barriers to business sale bliss are low or declining profit and revenue source concentration. After all, it’s steady and dependable profit that drives value. Add consistent growth, and buyers will line up at your door. But many slam-dunk deals are derailed by latent defects uncovered during due diligence. What are these bugaboos that can rise out of nowhere to snatch defeat from the jaws of victory?

Real Estate. In three classic situations, real estate can bite you. First, location is critical, but you can’t convey it to the buyer at a price certain for a sufficiently long time into the future. Second, you are obligated to a

long-term lease, but the buyer wants to relocate the business. Third, you own the facility occupied by the business, the buyer wishes to relocate it, and you’re not confident you could find an-other buyer or tenant.

Unresolved Litigation. Busi-ness buyers avoid acquisi-tions that include assumption

of unquantifiable liabilities. Unresolved disputes, litigation and threatened litigation are unquantifiable liabilities. That is, they carry a cost — in both time and money — that’s difficult or impossible to estimate.

Environmental Liability. Business buyers test the ground and groundwater beneath any business they consider pur-chasing. If contamination is found, the deal is as dead as the tree your letter of intent is made from. If there’s any chance you could have an issue here, consider going ahead and investigating the facts now and remediating any problems.

Assignment of Contract. Anytime a landlord, lessor, franchisor, distributor or licensor must approve a sale or transfer of control, the deal is not entirely in the hands ofthebuyerandseller.Thetimetoavoidorminimizethe clauses is when the agreements that contain them are established, or at the very least, well in advance of an attempted business sale.

Title Issues. Whenever rights to an asset are critical to the ongoing revenue stream or profitability of a business, buyers want total assurance that after their contemplated purchase they will have use of the as-set. In some cases, assurance of exclusive usage is required. To the extent that buyers can secure use of

the important asset but at an inflated price, the busi-ness purchase price goes down commensurately.

Unlicensed Use of Copyrighted Works. If you’re using a software program or other intellectual property on an unauthorizedbasis, yourbuyermaynotbewilling to

“risk it” as you have been doing. Most buyers — during the pre-purchase audit — identify all intellectual proper-ty used by the company and then investigate whether thecompany’suse isauthorized. Ifunauthorizeduseis identified, most buyers want to figure out the total cost of “going legit.” Such may include penalties plus ongoing costs. If the expense can be pinned down pre-closing, the purchase price can be reduced dollar for dollar. If it cannot, you may have a problem.

Debt Prepayment Penalties and Re-Price Triggers. Typically, interest-bearing debt of the seller is paid off in full at closing (by the seller, using monies paid by the buy-er). If said debt has a prepay penalty, it could put a dent in the seller’s sale economics. Conversely, if the seller enjoys debt financing that’s attractive to the buyer, so-called change-of-control covenants could spoil the party.

Double Taxation. Uncle Sam takes a healthy cut when-everagainisrealized,butfewsellerspullbackfromtheclosing table because of the taxes, that is, except when the selling entity is a C-corporation. C-corporation sell-ers face double taxation when the buyer buys assets. Yes, the seller could require the buyer to purchase the stock instead, but it’s not that easy. Buyers pay less when they are forced to acquire C-corporation stock. There are a few strategies for reducing taxes in a C-corpo-ration asset sales (see “Reducing Taxes in a C-Corp Sale,” May/June 2006 issue), but it’s an uphill battle. The best strategy is to convert to S-corporation status well in ad-vance (eight or more years) of the anticipated sale date.

Minority Shareholders. If you don’t own 100% of your company, your deal could get held up. First, if the par-ties choose to effect the sale by purchase of stock, any minority shareholder could hold up the deal if you don’t have agreements in place that force them to accept terms agreed to by the controlling shareholders. This is because buyers almost always want to buy 100% of the outstanding stock. Second, minority owners can hold up asset sale transactions if a so-called super-majority pro-vision exists in your governing documents.

Remove Roadblocks to a Timely Closingp u r c h A S E , S A L E A n d vA LuAT i O n O F c O M pA n i E S

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Want to know where the economy is headed? The stock market? Inflation and interest rates? Dr. Gary Shilling tells you. The only question is whether you believe him. He ap-parently has correctly forecast recessions and interest rate trends over the past 40 years. He’s foretold the Internet stock collapse of 2000 and the global real estate and mortgage debacle in which we are now mired.

Who is this seer?

He’s no slipper-footed swami. He’s an econ-omist. He studies the pages of history and analyzesmountainsofmacroeconomic,so-cio-demographic and financial data — past and present — and spots unsustainable ir-regularities and instances where history is repeating itself. He’s able to look into layers of data and see weather patterns where most see just clouds.

How does he do it? He’s an intellec-tual cyborg. Bachelor’s in physics from Amherst, magna cum laude. Master’s and doctorate in eco-nomics from Stanford. He worked for The Fed while in his 20s and became chief economist for Mer-rill Lynch at the age of 29. He’s an economic advisor to investors and institutions across the globe and former member of the New York Stock Exchange. He has been named one of the world’s top stock market forecasters. He’s made a

fortune investing his own funds. For example, he was an ad-visor to and co-investor with John Paulson (Paulson and Co.), who earned $20 billion in 2009 betting correctly on the col-lapseofcollateralizeddebtobligation(CDO)securities.

In The Age of Deleveraging, Shilling tells us where he thinks the economy is headed and why. He also tells us where he thinks we should put our money in the years ahead. The Age of Deleveraging is fresh off the press. The foreword is dated May 2010 and the copyright is 2011.

Shilling says the coming decade will be marked by lower lev-els of consumer expenditures. The reason? Aging U.S. baby boomers will finally turn in earnest toward padding their finan-

cial nests for retirement. Real estate values have collapsed and home value appreciation can no longer be counted on. So consumers are amending their big-borrowing and big-spending ways. Savings rates will rise and spending will fall.

The impact? Low levels of economic growth worldwide.

U.S. consumer spending accounts for a whopping two-thirds of U.S. GDP and is the lo-comotive that pulls the entire world economy. Any sustained reduction in consumer spending will result in lower levels of economic growth. Slack demand — for everything from cars and houses to travel and entertainment — will result in excess supply and cutthroat price competition. As a result, deflation poses a far greater threat than inflation.

What can the business owner do with this information?

• Readthebook.Don’trelyonthissummary.

• Becautiousaboutaddingcapacity.Revenuegrowthmay not be there to support it. Focus instead on cost reduction and efficiency enhancement.

• Pay down debt. Profit growth will be difficult. Survival could at times hinge on who has the lowest cash flow burden.

According to Dr. Shilling, the next 10 years will be more like the 1950s than the 1980s, 1990s or 2000s. It will become cool again to be thrifty and practical. It’s what we need to pay down debt at the personal, corporate and governmental levels, but it won’t be good for the econo-my or stock market.

The Age of DeleveragingBy A. Gary Shilling, PhDReviewed by David Perkins

p r O F E S S i O n A L d E v E L O p M E n T

Over the next 10 years it will become cool again to be thrifty and practical, but it won’t be good for the economy or stock market.

What are your top concerns for 2011? Share your thoughts with us. Email, comment on articles, tweet or post on Facebook.


When it comes to selling a business for maximum value, timing is everything. Start the process when the busi-ness’ performance is trending up, the economy is strong and buyers are aggressive. Get multiple buyers working and you’ve got it made — so long as you’ve cleared away the deal killers in advance.

David L. Perkins, Jr. wrote this article. Kenneth F. Albright, a tax lawyer and transaction lawyer, partner at the firm of Albright, Rusher and Hardcastle, contributed his expertise.

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The Internet is a marketplace, one in which virtually every business in the world can participate. It’s BIG business. For that reason, it’s a battleground. Businesses, products and services — and jobs and fortunes — are won and lost based on search engine results and web page views.

People search the Internet and you want them to find you and your products. Your customers search and you’d like them to find you. But someone has your URL or more particularly, your business or product name in a URL he or she now owns.

What can you do?

First, understand the law. Just because the name of your business or product or service is in someone else’s URL does not necessarily mean that he or she is infringing on your rights. A URL is a location, first and foremost, like a piece of real estate. It is not a product or ser-vice (in most cases). What is sold at the URL is the product or service.

If someone had bought apple.com before Apple did, the computer company would not necessarily have had a claim nor would it have been harmed. After all, Apple could al-ways have used applecomputer.com, for example. The way the law has developed, this “case” would pivot on the in-tent of the party and how the owner put the URL to use.

If the presumptive owner of apple.com had provided goods or services under the name Apple, such as Apple Tree Service or Apple Children’s Clothing, he or she would have been exercising a legitimate right to use the URL for this purpose. The owner would not have been infringing on Apple computers in any way. But if the owner had at-tempted to use the domain in a manner that simply prof-ited (or attempted to profit) from Apple’s brand, such as by setting up a website that would profit from the traffic that would come from Apple’s brand or marketing efforts, or by buying and holding the valuable URL in hopes of simply selling it to Apple for an inflated price, Apple would have recourse under the law.

If someone owns or is using a URL that contains the name of your business or one of your products or ser-vices, there’s a low-cost and efficient means for seeking justice, i.e., gaining ownership of the domain. It’s an alter-native to the court system; you can use it against any URL

owner anywhere in the world. The total costs should not exceed $2,600 (at the very most), and you don’t have to travel or hire an attorney.

ICAnn and UDRP

The Internet Corporation for Assigned Names and Numbers (ICANN) developed the Uniform Domain Name Dispute Resolution Policy (UDRP) for resolution of disputes over registration of Internet domain names. UDRP currently appliestoall.biz,.com,.info,.name,.net,and.orgdomains,and some country code top-level domains.

What you may not be aware of is that when you or ANY person or entity (“registrant”) in the world purchases a domain name, the registrant represents and warrants, among other things, that registering the name “will not infringe upon or otherwise violate the rights of any third party.” The registrant also agrees to participate in an ar-bitration-like proceeding if any third party asserts such a claim. In such a proceeding, called a UDRP proceeding, the claimant must establish three elements to succeed:

1. The domain name in question is identical or confus-ingly similar to a trademark or service mark in which the complainant has rights.

2. The registrant does not have any rights or legitimate interests in the domain name.

3. The registrant registered the domain name and is us-ing it in “bad faith.”

The registrant will fail the “legitimate interest” and “bad faith” tests if the primary economic motive was to profit, in some way, from the brand recognition or goodwill of another. More particularly, in a UDRP proceeding, the

“judge” (UDRP panel) will consider several non-exclusive factors to assess bad faith, such as:

• Whethertheregistrantregisteredthedomainnameprimarily for the purpose of selling, renting or other-wise transferring the domain name registration to the complainant who is the owner of the trademark or service mark.

• Whethertheregistrantregisteredthedomainnameto prevent the owner of the trademark or service mark from using the domain. For more on trademarks and trade names see “Patents, Copyrights, Trademarks and Trade Names” in the September/October 2010 issue of this publication.

• Whetherthedomainnameownerhasengagedinapattern of such conduct.

Is Someone Using YOUR Domain name?L E G A L

A URL is a location, first and foremost, like a piece of real estate. What is sold at the URL is the product or service.


nmea.thebusinessowner.com6 THE BUSInESS OWnER JAnUARy/FEBRUARy 2011


A Denver-based business owner called me today to dis-cuss his desire to sell. He said:

“I know a handful of companies that would be really good buyers for this business. I could just call them, but for some reason that doesn’t feel right. Why?”

This business owner’s instincts are right, and he’s in the minority. A good many business owner-sellers make the mistake of handling the sale themselves. After all, “if you want a job done right, do it yourself,” right? But “For Sale by Business Owner” is not the way to garner maximum value. It’s not the way to maintain confidentiality. It’s not the way to get the deal done in a timely manner.

Pitching for your own benefit just does not work well. Why? I explained it to the Denver business owner like this:

Joe Wright would like to join Old Pine Country Club, the most prestigious in the region. Joe knows several mem-bers, so he calls them and expresses his interest. Each is a bit taken aback by his directness. No big deal, but when

they learn that Joe called sev-eral of them, it becomes a bit of a joke among the members. And because Joe’s the subject of ridicule, nobody wants to sponsor Joe and nobody’s very excited about him becoming a member.

Kevin Best also wants to join Old Pine, and has friends who are members, but he instinctively knows the job is one best handled by a representative. It’s a bit like enticing a cat onto your lap. He knows the members will want him only if he doesn’t want it too badly, and he’s humble and appreciative. So Kevin doesn’t make calls and inquiries himself but rather figures out who might be the most willing and able to represent him. Then, when he happens to be around this person and the time is right, he expresses his high regard for the club and the quality of the membership. Inevitably, the member says,

“Hey, Kevin, you should join.”

Now Kevin reacts with great humility and flattery, but he’s careful to temper his enthusiasm. He says, “If you would like to have me as a member, I would not object, but I doubt seriously that I meet the qualifications,” or something of that order.

Kevin’s sponsor now takes it upon himself to call vari-ous members and explain what a great guy Kevin is and what a great member he’d be. The sponsor makes it his

personal mission to get Kevin in, and the members lend their support because of the sponsor’s efforts as much as anything. And because Kevin is not tooting his own horn, everyone trusts that what Kevin’s sponsor says about Kevin is true. In fact, because perception is reality, all those flattering things being said about Kevin ARE true.

Kevin’s application is well received, he gets in, and it’s an easy and enjoyable process for him. All he has to do is smile and be gracious. Joe Wright? Unfortunately, he’s still making calls, schmoozing, and word’s all over town that he wants to get into Old Pine, but nobody wants him.

Buyers simply do not trust sellers who peddle their own business. They innately think something must be wrong. But when a skilled representative calls and talks to buy-ers and explains why such and such business is a great investment opportunity, and that Mr. Seller is a great guy, buyers listen and the seller can stick to what he should: running the business and being a “nice guy.”

Selling a business is like applying to join a country club. Nobody wants to pad the pockets of a person who toots his own horn.

Selling a Business Is Like Joining a ClubB U S I n E S S S A L E

Send your comments and questions to [email protected].

Nobody wants to pad the pockets of a person who toots his own horn.


• Whethertheregistrantregisteredthedomainnameprimarily for the purpose of disrupting the business of a competitor, or whether by using the domain name, the registrant has intentionally attempted to attract, for commercial gain, Internet users to the registrant’s website by creating a likelihood of confusion with the complainant’s mark.

If a claimant loses a UDRP proceeding, in many jurisdic-tions it may still bring a lawsuit against the domain name registrant under local law. If the claimant wins, ICANN simply instructs the defendant’s Internet Domain Reg-istrar to transfer ownership of the subject URL to you. Then you can move it to your registrar if you wish.

David L. Perkins, Jr. wrote this article. Luna M. Samman provided her expertise. She’s an associate in the Intel-lectual Property Practice of Dickstein Shapiro LLP and you can reach her at [email protected] or at 202-420-4860.



Owners of small and midsize private businesses maybear more undiversified risk than any other group. Starting or buying a business requires cash. Growing a busi-ness requires cash, too. Most business owners have limited funds, and obtaining additional equity or debt capital can be difficult or at least costly and time-consuming. The common result is extreme concentration of assets in the business. In doing this, the owner breaches one of the most widely accepted principles of prudent investment — diversification.

The validity of diversification is so well accepted in finance that it is sometimes called the law of diversification. It’s a risk management technique. It espouses spread-ing around your investments among a diverse, unrelated group of investments rather than concentrating them in a single investment or a few, related investments. Diversification allows the investor to limit the impact that random and unforeseen events can have on a portfolio.

The inverse of diversification is concentration risk.

In the first days when a business is newly formed or pur-chased, there aren’t many ways for the typical investor/owner to avoid concentration risk. Consciously or sub-consciously, he or she bears that risk in exchange for the chance to live the dream of freedom and indepen-dence. Some ways to limit concentration risk at the onset include obtaining additional equity investors, securing non-recourse debt financing, avoiding having your spouse sign as guarantor, not pledging your home or other personal

assets as collateral, and buying or starting a business that requires only a portion of your cash or investable funds.

But as the business grows and prospers, the opportunities to diversify improve. The prudent business owner will do so, and the Internal Revenue Service Code provides meaningful in-centives. Regular allocation of company profits to owner accounts (e.g., IRA, 401(k), Keogh, SEP) can yield significant gains over time in personal financial security and risk reduction. The goal is that the quality of your retirement would be acceptable even if disaster struck your company.

We all know that private business is inherently risky. Private investment is risky. Even home prices have de-clined recently. To gamble your entire financial well-being and retirement security on a single, private business is a risk no one should have to bear for an entire lifetime. It may be the nature of private business ownership, but it doesn’t have to be — at least not forever. Talk to your financial advisors about ways to diversify and lower your concentration risk. The Business Owner offers ideas that may be good places to start.

The Diversification ImperativeI n V E S T M E n T

The validity of diversification is so well accepted in finance that it is sometimes called the law of diversification.

Question: If an employee enters into an agreement that obligates the company financially, and we did not give him permission to do so, do we have to honor it?

Answer: It depends on whether the counterparty to the contract justifiably relied on the employee having the au-thority to bind the company to the agreement.

An employee, whether or not he or she is an officer, may commit the company to an obligation if you hold him orheroutasauthorizedtomakethattypeofobligation. For example, a supplier can regard a company purchas-

ing agent as having the authority to place orders. This is referred to as “apparent authority.”

An employee with what is referred to as “apparent author-ity” may also bind your company. Apparent authority is when the employee carries a title that implies the ability to bind the company, such as manager or vice president. So, irrespective of your internal understanding with that em-ployee, an employee’s title may make you liable for acts he orshetakeswithoutyourdirectorpersonalauthorization.

Q&A: Employee Commits Biz to Unwanted Obligation

L E G A L

continued on page 11



All investors, including business owners, should use diversi-fication as a defense against random and unforeseen events. You’ve placed your money in what is called “private equity,” i.e., your business. You must work to achieve meaningful fi-nancial diversification by investing outside of your business, but you should also use the law of diversification within your business to fortify and protect the business:

Customers. What would be the impact on your com-pany if you lost your largest customer? If the answer is “severe,” then you bear customer concentration risk1. Do you think you have an exceptionally strong re-lationship with your largest customer? If so, can your relationship prevent such things as fire, fraud, death, di-vorce or change of ownership? Probably not.

Contrary to what many owners think, diversity is achiev-able. It may take years, but once you secure customer diversity, then you have significantly increased the chance that your company will be around for the long run. You have increased its value, too.

Most regular acquirers of companies consider 10% to be the threshold between healthy customer diversifica-tion and concentration risk. If the largest customer, or any customer, accounts for more than 10% of annual revenues, buyers typically reduce the price they’re willing to pay — to account for customer concentration risk. Business owners should use this gauge, too.

Industry. What industry do you serve? If you could an-swer this question with the name of a single industry, then you bear industry concentration risk. Only com-panies that sell into multiple industries enjoy industry diversification. Over time, small companies should iden-tify and penetrate multiple industries. For example, a printerthatspecializesinBaptistchurchbooksandmaga-zinesshouldexpandtootherdenominations,thenexpandoutside of faith groups to produce corporate annual re-ports,forexample,ortravel-relatedmagazines.

Product. The “category killer” of the 1800s, U.S. Saddle and Whip Co., no longer exists because of its failure to diversify its product lines. If the company had only diversi-fied into other types of leather goods, such as automobile seats or driving gloves, its great-grandchildren might be graduating from Harvard Business School today and man-aging the family foundation.

Employees. Reliance on a single, or a few, talented employees has caused the failure of more than a few companies. A private company owner should do all that

he or she can to reduce exposure to the sudden depar-ture of key employees.

First, consider key-man insurance to insure against death or disability of key contributors. Next, break up key tasks performed by your most critical people and spread them around to as many people as possible.

Vendors. Private companies that purchase unique items or services from a single vendor, or purchase components that would be hard for another company to duplicate, may bear significant risk. Take your key vendors and ask yourself, “If XYZ vendor burned down or closed due to financial problems, how would my business be impact-ed?” If the answer is “greatly,” you need a contingency plan. You should consider insurance, and begin plotting a course of action to mitigate this random risk exposure.

Credit. The lifeblood of many businesses is their source of funding. What if your banker pulled your line of credit, or your largest vendor stopped offering you attractive payment terms? During difficult economic times, credit sources can dry up unexpectedly. Business owners shouldrecognizecreditriskandworktoensurethatthislifeline remains extended.

Geography. The business cycle tends to roll through indus-tries and geographic regions in a less-than-uniform manner. If all of your customers are in a single state or country, you bear risk associated with your lack of geographic diversifi-cation. Try to find customers located elsewhere. 1 Concentration risk is lack of diversification in revenue or profit sources.

Diversification Within the Private CompanyM A n AG E M E n T

“it was a calculated risk, and we forgot to carry the one.”© Mark Anderson, All Rights Reserved www.andertoons.com


Share your efforts to diversify by commenting online at nmea.thebusinessowner.com.



Legal challenges an employer faces on hiring an employ-ee begin with the interview process and continue long af-ter an employee has been terminated from employment. From pre-employment inquiries to post-employment references, employers are confronted with a panoply of laws that regulate and restrict their ability to manage per-sonnel. This article addresses what some refer to as the

“Big Three,” including the Civil Rights Act, the Family and Medical Leave Act, and the Fair Labor Standards Act.

Title VII of the Civil Rights Act

The most common form of litigation that employers face is employment discrimination. Title VII of the Civil Rights Act

of 1964 prohibits discrimination in employment because of race, col-or, religion, sex or national origin. Title VII applies to all private-sector employers with 15 or more em-ployees. Smaller employers may be subject to state or local laws. For example, New York state’s Human Rights Law applies to em-ployers of four or more persons.

Until 1991, Title VII, although a significant source of litigation, was of less concern to employ-ers from an exposure standpoint because it permitted neither (1) the right to a jury trial, nor (2) the recovery of punitive damages. But in 1991, Congress amended Title VII to provide both remedies.

Title VII, though most commonly used in the employment termina-tion context, prohibits discrimina-tion in other employment contexts

as well, such as hiring (e.g., the interview and selection process), promotion, work environment and retaliation. In the interview process, employers are precluded from asking applicants questions that not only directly request but could indirectly disclose information about an employ-ee’s age, national origin or other protected classification.

The “hostile work environment” context has become the focus of cases involving sexual harassment suits. Such liti-gation has probably been the leading factor in prompting employers to establish policies against, and procedures for employees to complain about, discrimination. In several recent decisions, the U.S. Supreme Court held that employ-

ers might often avoid liability in hostile work environment cases by maintaining policies and complaint procedures and responding promptly to employee complaints.

Thus, it is essential for an employer to develop, implement and enforce a non-discrimination policy and complaint pro-cedure. This type of procedure will not provide a defense in litigation involving “quid pro quo” sexual harassment, that is, an act of sexual harassment committed by a su-pervisory or managerial employee against a subordinate, combined with a threat of adverse job action or prom-ise of job benefit. But such a policy and procedure will nonetheless encourage employees to initially use internal complaint procedures rather than turning to external judi-cial or administrative forums in the first instance.

Family and Medical Leave Act (FMLA)

Similarly, maintenance of a policy and procedure is essen-tial for companies with 50 or more employees in ensuring compliance with the Family and Medical Leave Act (FMLA). FMLA provides that eligible employees are entitled to 12 weeks of unpaid leave per year upon the birth or adop-tion of a child, or the “serious health condition” of an employee or immediate family member. Eligible employ-ees are those who have worked for an employer for at least 12 months, have worked more than 1,250 hours in the prior one-year period, and work at a location where at least 50 employees are employed within 75 miles.

Because FMLA permits leave in intervals of one hour or more, its application and use has become an administra-tive nightmare for employers, particularly small-business owners, who must accommodate leaves of varying length, often with little or no notice. Moreover, eligible employees, other than “key employees,” are guaranteed return to their former position upon completion of the leave.

FMLA has particularly affected companies with fixed atten-dance policies, i.e., companies that terminate employment after 15 absences in a calendar year. Because employers often do not initiate the FMLA process for absences of one or two days (nor inquire as to whether an absence is for an FMLA-qualifying reason), care must be taken, in case a termination is triggered by an employee’s absenteeism, that FMLA-qualifying days of absence are not counted. Although employees must notify the employer that an ab-sence is due to an illness of the employee or an immediate family member for the employer’s obligation under FMLA to be triggered, the employee need not use the term

“FMLA” in his or her notification. There has been a marked

do You Know how to Act?L E G A L

Employers might avoid liability in hostile work environment cases by maintaining policies and complaint procedures and responding promptly to employee complaints.


10 ThE BuSinESS OWnEr JAnUARy/FEBRUARy 2011 nmea.thebusinessowner.com


increase in the number of employment terminations chal-lenged under FMLA in 2002. Such suits can be blunted successfully by implementing and following FMLA policy and procedure, part of which requires employees to provide medical certification for their absences.

Fair Labor Standards Act (FLSA)

A third area of increased litigation activity has been over-time wage claims under the Fair Labor Standards Act (FLSA). FLSA does not have a minimum employee require-

ment, as applies to all employers engaged in commerce. Under FLSA, employees who work more than 40 hours in a week must be paid time and a half their regular hourly rate for all hours worked past 40.

FLSA exempts from the overtime requirement bona fide executive, administrative and professional em-

ployees, as well as outside salespersons. A common pitfall in classifying employees as exempt has been a misunder-standing of the significance of the “salary” basis of payment. Although one of the requirements for exempt status is that an employee receives a salary of at least $250 per week, regardless of the number of hours worked, payment of a salary is not sufficient to satisfy the exception. Thus, em-ployers have often classified employees with titles such as assistant manager, administrative assistant or sales man-ager as exempt, based on receipt of a “salary,” when these employees are not exempt and are entitled to overtime. This potential problem, which often arises in a suit filed after an employee has been terminated from employment, and/or may become the subject to an investigation by the U.S. Department of Labor or a state labor agency, can be avoid-ed by conducting an internal audit of all job titles deemed exempt to ensure that they satisfy the statutory exemption.

Another more recent source of employee claims under FLSA has involved a failure to pay minimum wage in situations where small companies, particularly start-ups in the technology area, have promised employees stock options and bonuses in exchange for an employee’s agreement to work without pay during the start-up period. Because payment of the minimum wage during each payroll period (usually a week) cannot be waived, such ar-rangements are unlawful, and employees are entitled to payment for the weeks in which no wages were paid, even if the payment of wages was made later and exceeded the minimum wage payment for all previous periods.

Unfortunately, FLSA provides for little creativity in meth-ods of payment, and has not been modified to meet current economic conditions and changes. In conclusion, although current federal employment laws do pose a minefield for the unwary employer, consulting with a hu-man resources professional or attorney when designing policies and procedures, combined with an internal audit of current practices, can often prevent exposure to litigation under the Civil Rights Act, FMLA and FLSA.

Jerry Goldberg, a labor and employment attorney in the New York office of Greenberg Traurig, wrote the substance of this article. For additional information, call 212-801-9200, email [email protected] or visit www.gtlaw.com.

FLSA law applies to employers of every size.



In addition, the CEO or president of a company is pre-sumed to have authority to enter into most contracts in the ordinary course of business on behalf of the business. It’s called “implied authority,” and an officer or employee in a particular area may have it as well, such as the vice president of marketing or the advertising director.

Since an employee or officer with actual, apparent or implied authority can bind your firm to a contract, you should establish internal controls on contracts above cer-tain dollar amounts. The controls may be in the form of approvals or review by other executives or department heads. Another option is to require two signatures on checks and contracts for large purchases above a certain dollar amount. In addition to educating your staff as to controls in place, you should periodically advise company suppliers in writing of these requirements by including directly on your Purchase Order the approval(s) and/or re-quirements for valid orders. This can provide meaningful recourseforremovingyourselffromunauthorizedobliga-tions made by employees.

continued from page 8



S&p 500 historical price to (p/E) Earnings Ratio

0

20

40

60

80

100

120

140

160

1946

1949

1951

1954

1957

1960

1962

1965

1968

1971

1973

1976

1979

1982

1987

1993

1998

2001

2006

2009

2004

Jan ‘

10De

c ‘10

Jan ‘

09

1984

1990

1995

Source: Standard & Poor’s

historical S&p 500 price to Dividends Ratio

1%

2%

3%

5%

6%

7%

4%

1960

1962

1964

1966

1968

1970

1972

1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2009

2010

average

Source: Standard & Poor’s

S TAT i S T i c A L dATA O F i n T E r E S T

Average Weekly HoursU.S. Manufacturing Laborers

35

32

34

33

2009

1/20

102/

2010

3/20

104/

2010

5/20

10

7/20

1011

/201

0

6/20

10

2000

2001

2002

2003

2004

2005

2006

2007

2008

Hou

rs

Production and non-supervisory U.S. manufacturing onlyAnnual data are average of monthly data for each year.Source: Bureau of Labor Statistics (“Employment Situation” release).

Purchasing Managers Index

2530354045505560657075

X

12/31

/07

12/31

/096/2

010

11/20

10

12/20

10

12/31

/05

12/31

/03

12/31

/01

12/31

/99

12/31

/97

12/31

/95

12/31

/93

12/31

/91

12/31

/89

12/31

/87

12/31

/85

12/31

/83

12/31

/81

12/31

/79

12/31

/77

12/31

/75

12/31

/73

12/31

/71

12/31

/69

Source: Institute of Supply Management

Initial Unemployment Claims Four-Week Average

650

600

550

250

500

350

300

400

450

Jan -

06

Jul-

06Ja

n - 07

Jul -

07Ja

n - 08

Jul-

08Ja

n - 09

Jul -

09Ja

n - 10

Jul -

10No

v - 10

Thou

sand

s

Source: Department of Labor; updated 07/29/10

Money Supply (M2)Percentage Change from 12 Months Earlier

12

10

0

8

2

4

6

1994

1996

1998

2000

2002

2004

2006

2008

2010

Source: Board of Governors of the Federal Reserve System



Tax Credit for Health Insurance Premiums PaidDecember 6, 2010

Are your health insurance costs rising? Claim your tax credit for 2010 health insurance premiums paid for your employees. Go to www.IRS.gov to obtain form 8941, Credit for Small Employer Health Insurance Premiums. It has instructions, but Notice 2010-82 provides a more detailed explanation designed to help small employers correctly figure and claim the credit.

In general, the credit is available to small employers that pay at least half of the premiums for single health insurance coverage for their employees. It is specifically targeted to helpsmallbusinessesandtax-exemptorganizationsthatprimarily employ moderate- and lower-income workers.

Small businesses can claim the credit for 2010 through 2013 and for any two years after that. For tax years 2010 to 2013, the maximum credit is 35 percent of premiums paid by eligible small businesses and 25 percent of premiums paid by eligible tax-exempt organizations.Beginning in 2014, the maximum tax credit will increase to 50 percent of premiums paid by eligible small-business employers and 35 percent of premiums paid by eligible tax-exemptorganizations.

The maximum credit goes to smaller employers — those with 10 or fewer full-time equivalent (FTE) employees — paying annual average wages of $25,000 or less. The credit is completely phased out for employers that have 25 or more FTEs or that pay average wages of $50,000 or more per year.

Included in the Affordable Care Act enacted in March, the small-business health care tax credit is designed to encourage

bothsmallbusinessesandsmalltax-exemptorganizationstooffer health insurance coverage to their employees for the first time or maintain coverage they already have.

Source: Internal Revenue Service

R E C E n T B L O G P O S T Sn m e a .t h e b u s i n e s s o w n e r . c o m / b l o g

Demise of the Annual Employee Pay RaiseDecember 22, 2010

Do you still give your employees an automatic annual pay raise? Or feel that you should?

Automatic annual pay raises came to be common practice in the 70s and 80s when inflation was, well, automatic. Inflation was a part of the economy every day, month and year. As such, the “real” purchasing power of the dollar eroded constantly. Raising employee wages with inflation was merited, fair, and it did not hurt the company’s bottom line so long as the prices of the goods and services sold by the firm were raised at the same pace.

But times have changed. Inflation is virtually nonexistent today. Certainly, few businesses can raise prices. If you give employees automatic raises today, it may simply constitute a transfer of your profit to your employees. Over time, it could kill your ability to operate profitably. And you know what that means. Soon, employees will have much more to worry about than whether their wages are keeping pace with inflation.

Do you still give annual automatic pay raises? Do your employees still expect them? Employees need to be educated about how and why such became the norm, and more important, why they no longer make sense. Merit increases? Of course. Automatic raises? Not so smart.


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2010 index of ArticlesI n D E x


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A how-to guide for business owners who wish to exit one day in a quiet, orderly and professional manner — for maximum value. Subscribe to The Quiet Exit free at TheQuietExit.comThis free publication is a service provided by Acquisition Advisors llC.

A Synopsis from The Quiet Exit

Free articles, information and case studies at AcquisitionAdvisors.com.

Call us confidentially at 877-525-4321.

What Every Business Seller Should Know

Your competitors are not the best buyers for your business. Although they’re easy to identify, they pose considerable risk and rarely pay the highest price. Risky — because they can and will use the fact that you wish to sell — and the information you share with them — against you. A lower value — because you don’t offer as much value to them in terms of industry knowledge, expertise, processes and methods.

It’s hard work locating better buyers, but the re-wards can be considerable. That’s why smart business owners hire Acquisition Advisors. We develop “highest and best buyer profiles” for your

business and then use them to sort through a data-base of every U.S. company, scores of international companies and our proprietary database of more than 3,000 private-equity groups. We then confiden-tially market your company to the leading candidates. Our goal is to deliver a range of competitive bids and deal structures for you to choose from and then work to complete the deal with your preferred buyer. All of this is done in strict confidence.

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Selling a Company • Buying a Company • Business ValuationClear, honest and committed representation for owners of midsize private companies


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Map Guides Business Owners to Maximum Value and Payday

Role of seller’s trusted advisors:

In-house accountant: Generation of detailed financial reports as needed. Locate and produce important documents.

CPA: Assist in selection of M&A firm. Estimate taxes to be due, with M&A firm, from projected deal. Suggest and devise tax minimization strategies. Confidant of seller.

Attorney: Assist in selection of M&A firm. In advance of the business sale effort, reduce or eliminate any hindrances or value-draining legal issues. Prepare the way for company sale — legally. Advise on structure of letter of intent (LOI). Lead preparation of purchase/sale agreement once LOI is finalized. Lead legal due diligence. Confidant of seller.

Financial advisor: Work with seller to project post-closing financial condition and health of seller. Invest proceeds post-closing. Can the seller afford to sell for price-terms estimated by M&A firm?

M&A Advisor: Brings in-depth “deal” knowledge and experience. Lead the development of the plan and execution of plan. Lead the project to an orderly and successful close. Maximize value at every opportunity. Utilize specialized knowledge of accounting, tax, legal and financial advisor.

11 Keys to getting a deal done for maximum value:

1. Experience — get M&A transaction experience on your team

2. Preparation — know what you want and devise a winning plan to get it

3. Packaging — a key component of getting top dollar

4. Locate the buyers that are willing and able to pay the most

5. Speed — time kills deals

6. Work all buyer candidates simultaneously

7. Full disclosure/cooperation during due diligence

8. Seller willing to assist, even materially, post-closing

9. Trust and integrity — if the buyer loses faith in seller’s integrity, the deal evaporates

10. Be reasonable, ready to negotiate. Be pragmatic

11. Get key manager(s) involved and motivated to cooperate.

Mistakes sellers make:

1. Begin the process before being fully committed to selling

2. Going to market without a realistic estimate of what the market will bear

3. Getting the attorney involved too early and/or letting the attorney or accountant handle or lead the major negotiations.

4. Deal with buyers one at a time (as opposed to all at the same time)

5. Hide facts

6. Wait for “a good buyer to come along”

7. “Do it yourself” or hire the accountant or attorney to handle the business sale project.

8. Fail to recognize that buyers value businesses based on earnings, profit, bottom line, and levels of risk.

9. Talk to just a few buyer candidates

10. Let buyers “string you along”

11. Fail to listen to the M&A Advisor and/or undermining the advisor’s authority during negotiations

12. Fail to deal from a position of strength.

13. Fail to require buyers to perform.

14. Act as if (or announce that) the deal is done before it’s done

15. Hiring one of the up-front fee collection scam M&A Firms

16. Failure to accommodate buyers’ concerns/fears

17. Failure to understand that selling a business is a sales exercise. It involves preparation, packaging, outreach, courting and selling.

18. Failure to understand and make accommodations for the tremendous amount of work required to “do it right”.

Reasons to hire an M&A advisor:

• Business purchase transactions are complex and risky

• Selling a business is about outreach, marketing and sales

• Only by hiring a dedicated firm will you be able to handle the workload and get the job done “right”

• When confidentiality is important, your M&A rep can talk to the buyers without discussing the identity of the seller.

• When price maximization is important, an M&A professional can accept incentives for higher sale prices

www.AcquisitionAdvisors.com

877-525-4321

Acquisition Advisors consults on the purchase, sale and valuation of mid-size private U.S. companies.

Copyright DL Perkins, LLC 2009 All Rights Reserved.

Acquisition Advisors is a registered trade name of DL Perkins, LLC.

The Path to Absolute Maximum Sale Price (of a business)

Post-closing “true up” of working capital and

adjustment of purchase price

Seller fulfills post-closing managerial duties

Settlement of any escrowed funds

Management and investment of net sale

proceeds

Monitoring and collection of any seller finance

obligations of buyer and/or any contingent notes

due to seller

Management, monitoring and collection of any earn

out terms

Phase 4: Post Closing(2 months to years)

Phase 3: Execute Sale Strategy(3 to 6 months)

Definitive Agreement

While the LOI outlines the primary deal

points, the definitive agreement ...

... is negotiated and drafted only if, and after, the primary deal terms are agreed to in writing

( LOI)

Critical negotiation time. Business seller(s) must

keep in mind:

> the deal is not done until the definitive agreement is fully negotiated, executed, and the money clears the bank.

> Business seller must guard himself against getting too emotionally attached to both buyer and deal. Most effective is for the seller to remain at a distance and let the M&A advisor — along with seller’s counsel — negotiate hard and skillfully. The quality of the deal can hinge on a single piece of contract language.

The M&A advisor and seller should remain integrally involved in

the contract language. Seller’s counsel provides the legal expertise but

nobody knows the deal points, business points and business risks/judgement

calls like the business owner himself.

... can be negotiated before, during or after due

diligence

... typically drafted in a manner that honors the

LOI terms, but the parties may agree otherwise

... will address any issues and/or concerns of

buyer raised during due diligence

... often mutually executed at closing, but sometimes

before due diligence is completed and thus

contains terms that speak to the completion of due diligence, purchase price

calculation, etc.

Site visits

Site visit granted to top 3 to 5 buyer prospects

Letters of intent solicited and received immediately

following site visit

Understand each LOI and negotiate to maximize

each deal point

Buyers ranked

Conference Calls

Conference calls set up between top 3 to 7 buyer

candidates and seller/seller representative

Preliminary written offers requested and received

Letter of Intent

Preferred buyer is identified. Attempt to

negotiate and secure LOI

B and C buyers are “managed” so they may

be able to step in if/when A buyer falters

LOI Typically Contains:

• Description of assets being purchased/sold

• Description of excluded assets

• Purchase price

• Purchase terms

• Working capital provision (i. e. definition, peg, and provision for w/c price adjustment)

• Stand still agreement (aka exclusivity and “no shop”)

• Confidentiality provisions

• Provisions for due diligence

• Provisions for negotiation of definitive agreement

• Target date for closing

• Statement of non-binding nature

• Seller’s obligation to operate business “in the ordinary course”

• Limit on size of capital expenditures and asset sales not in ordinary course

Closing

Closing may occur when ...

... all due diligence is completed and all deal terms are negotiated and placed in the definitive purchase agreement to the satisfaction of both buyer and seller

... buyer has secured all necessary financing

In most cases ...

... buyer assumes working liabilities

... seller pays off interest-bearing debt at closing

... all debts of the business that are NOT assumed by the buyer are paid in full by seller at closing

... all advisors and specialists are paid at closing out of sale proceeds

All candidates must be contacted within two

weeks of initiation

Call in’s screened against do not call list

Confidentiality agreement executed for each buyer

candidate

Offering memorandum provided by M&A advisor to approved buyers who agree to confidentiality

agreement terms

Sell-side M&A advisor introduces the

opportunity and answers basic questions as per plan

Ballpark offers obtained from buyer candidates

Buyer Search 6 to 12 weeks

Using blind/generic summary data

email campaign?

letter campaign?

web posting?

phone call campaign?

Due Diligence(60 to 120 days)

Legal (contracts, title/ownership, corporate, litigation)

Tax

Environmental

Financial

Products

Industry/markets

Vendors

Customers

Personnel

Seller must accommodate buyer’s

need to investigate any and all areas the

buyer deems necessary for him, her or it to fully “understand” the business and

comprehend the latent and manifest risks and opportunities. Areas of due diligence typically

include:

Accumulate Value Drivers

Near term revenue growth

High revenue

Well organized “GAAP” books and records

Steady and rising revenue

Foster positive industry reputation/goodwill

Eliminate any tax reduction methods buyer could deem

“unscrupulous”

Diversify customer base

Build unique and recognized “brand”

Diversify geographic areas from which revenue is derived

Build and diversify executive/employee team

Diversify industries served

Reduce and/or eliminate management duties of owner(s)

Build evergreen/recurring revenue (ex. equipment

manufacturer adds service revenue)

Diversify “rainmaker” sources

Automated and standardized systems and processes

Structure it to be low in capital intensity

Acquisition Advisors Best Practice MapTM

This map was developed by Acquisition Advisors to assist business owners and their advisors in maximizing value — enterprise value and sale value. Enterprise value is maximized during ownership when the value drivers listed herein are accumulated and the

barriers to marketability, also listed herein, are eliminated. Such a business will enjoy enhanced profitability, lower risk and greater stability. The value that is actually obtained via recapitalization or sale is what we refer to as sale value. Sale value is a function of both

the enterprise value and how the sale process is conducted. That is, the planning, preparation, packaging and process execution.

Selling a business for maximum sale price is complex, labor intensive and time consuming. Failure to eliminate barriers to marketability, for example, will hinder the price received. Failure to skillfully plan, package or execute the sale process will reduce

it further. Business owners maximize sale price by building enterprise value and then, when they wish to sell, hiring a skilled, experienced and dedicated M&A advisory firm.

Sale Price = Enterprise Value + Packaging + Process + Dealmaker Skill

Create proprietary products, processes, services

Do any of your legal docs, such as bylaws,

operating agreement or shareholders agreement

pose any restrictions?

Avoid near term revenue decline and/or margin

slippage

Address/remove seller fears/misconceptions that

could hinder process

Resolve legal problems (actual and threatened)

Solve “who will run the business” for the new owner

Maintain up-to-date corporate books

If C-Corp, change to pass-through legal (tax) entity

Clean up any minority shareholder problems

Eliminate Barriers to Marketability

Phase 1: Build a Valuable Company

High profit margins (gross and operating)

Scalability

Resolve any title problems (i.e. ownership of important assets)

Eliminate any “off the books” owner perquisites

Conduct basic due diligence on candidates

via internet searches

Identify candidates via references from your

advisors and peers, and “done deal” announcements

Watch out for the “seminar” companies that charge lump sum up-front

retainers

Phase 2: Plan and Prepare for Sale(2 to 6 months)

Packaging

Develop generic summary of offering

Develop confidentiality agreement

Amass all the info buyers will request and have

ready for swift production

Historical income statements

Historical balance sheets

Depreciation schedules

Tax returns

Revenue and gross profit by customer

Compensation and tenure of key employees

Employee benefits summary

Corporate book

Articles and bylaws

Disclosure of any disputes

Evidence of title on assets

All legal agreements of any type

Description of real property

List of all assets

Historical owner compensation and

benefits

Documentation of any addbacks

Copy of any shareholder or buy-sell agreements

Copy of any employment agreements

Timing of Exit

Sell when your industry is “in vogue” or garnering

broad interest

Sell when broadereconomy is robust and

interest rates are low

Sell to strategic buyer when one is active and

acquisitive

Sell late (four or five years) in a period of broad

economic expansion

Sell when there’s widespread optimism about the future of the

overall economy

An M&A expert or firm can help you assess

timing issues

External considerations

Internal considerations

What will owner(s) do after the sale?

Personal ambitions of owner and owner’s

family?

Interests/needs of minority shareholders?

Company performance up? Peaking?

Interests/needs of key employees?

Health (mental and physical) of owner(s)?

Can the seller afford to sell (financially)?

Alternative uses for capital tied up in subject business? (opportunity

cost of capital)

Needs of the business itself (for capital, talent,

volume, distribution, etc.)

Seller’s sale price and terms expectations or requirements relative to marketplace reality

Select and engage an M&A representative

who ...

... is well-established and experienced (i.e. gets deals done)

... specializes in representing companies similar to yours

... you feel comfortable with

... is interested and excited to serve you well

... has a favorable reputation which can be verified via unbiased sources

Seller Preparations

Set goals and objectives

Deal with seller’s process-related fears/concerns

Does seller fully understand and trust the process?

After-tax net cash (after all expenses and necessary payoff of debt) seller can

expect from sale?

Does seller have a realistic understanding of the confidentiality issues, strategies, realities?

Does seller understand the process will be time

consuming for him or her?

Does seller understand that full disclosure is required?

Does seller understand/accept he/she will lose control of the subject

business?

Does the seller understand the buyer’s desire for some

seller financing?

Does seller have realistic expectations regarding

sale price and terms?

Does seller fully understand that site visits

will be required?

Does seller understand at least one employee (CFO) will need to know about

the project?

Does seller understand the sale may be great for the

business and the employees?

Does seller fully understand why he/she is not negotiating the deal

himself or herself? (i.e. that “representation works”)

Does seller fully understand his or her role in the process?

(i.e., to be professional, likeable, cooperative,

trustworthy, knowledgeable about business and its past

and possible future)

Does seller fully understand the role of his/her other advisors in the process?

(see accompanying list of advisors and their roles)

Does seller fully understand the importance of how he or she responds when the “moment of truth” arrives?

(i.e. when buyer attempts to negotiate directly with seller

and/or gain concessions directly from seller).

What will seller do with sale proceeds? (i.e. , how will he or

she invest them)

What will seller’s income and expenses look like

post-closing?Can the seller afford to sell?

Does seller understand what role(s) he/she should not play? Primarily, should not get directly involved in the

deal terms.

Strategic Plan

Develop confidential outreach strategy

What will we say?

What won’t we say?

Why are we selling?

What are we selling?

What is our “pitch”?

Clearly define role of the seller, M&A advisor,

accountant, lawyer

How will we locate buyer prospects?

How will we contact buyer prospects?

How will buyers not on our list find us? Do we need them to find us?

Timing issues? (internal and external)

Do we have the manpower to execute our outreach plan and

work all buyer candidates simultaneously? Does our

M&A firm?

Develop timeline for buyer prospect

outreach, screening, offer solicitation, conference

calls, site visits, etc.

Will seller retain management role?

Will seller retain an ownership stake?

How will we maintain confidentiality?

Develop and organize “held back” data (to be

placed in dataroom)

Buyer Search Plan

Who should buy us?

Create hypothetical “highest and best” buyer

profiles

Strategic buyers?

Financial buyers (i.e., private equity groups)?

Industry/corporate buyers?

Individuals?

Employees or current minority owners?

Current vendor or customer?

U.S., foreign?

Who is likely to be willing and able to pay the most?

Why?

Who is likely to be able to meet the other seller

objectives?

What buyer types would probably be willing and

able to pay the least? Why?

Which buyer types pose the greatest risks? Why?

What are the risks?

Develop list of buyer candidates

Develop Do Not Call listAdopt and execute

Corporate resolutions authorizing sale

Develop comprehensive offering package

Company history

Ownership

Legal structure

Overview of products and services

Overview of management and personnel

Overview of industries and markets served

Summary of revenue and income performance (current and historic)

Summary review of balance sheet (current and historic)

Projections

Reason for sale/offering

Opportunities for growth

Seller’s role post-closing

Process, protocol and confidentiality

Facilities

List of assets with estimate of market value

List of liabilities, actual and contingent, with estimate of current market value

Does the seller understand that the

buyer’s motivation is to make a lot of money from

the purchase of seller’s business? That buyer will

not buy unless he/she becomes convinced that

he/she can and will do so?

Does the seller understand that he/she may very well be able

to earn more money by keeping the business (i.e.

not selling it)?

Does the seller understand there are few stupid buyers, and even when one is found, they have a hard time getting

deals closed?

Has seller fully reconciled any differences between

what the M&A advisor says is a reasonable

expectation for price/terms with what seller has

heard other companies have sold for (via “the

grapevine”)

Identify legal representative candidates

that have significant transaction experience

and that are deal “doers” not deal killers.

Will selling shareholder(s) lose an important tenant for shareholder-owned

real estate?

What will happen to the products/services?

What will others think of seller if he/she sells? Does

it matter?

What will happen to the company name?

What are seller’s priorities, in order of importance?

Total sale price?

Cash at closing?

Ongoing role of owner(s) with the company (post-closing)?

Secure additional capital for the business?

Secure better distribution for products and services?

Secure additional talent, experience, connections?

Safety and opportunity for employees?

Quality tenant for owner-occupied real estate?

Equity in Newco?

Business remains located in certain community?

Other

Owner/Manager must not take their eye off the ball re: management. It’s critical that the business’ performance stay strong during this period!

Lower Value

Sale Price ($)

How a Business Is SoldGreatly Impacts Price

Higher Value

Enterprise Value

Packaging

Process

Dealmaker Skill

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What should you do today to build the value of your business? To maximize the eventual sale price? Acquisition Ad-visors has put it on paper. A single piece of paper. This amazing map contains all the things that drive value higher and, conversely, sap value — from a busi-ness buyer’s perspective.

The Path to Absolute Maximum Sale Price (of a Business) map has four main sections dedicated to how a business owner should go about preparing, pack-aging and executing the sale to garner absolute maximum. Each section is a phase in the journey that — if the steps are followed — will lead to a sale at ab-solute maximum:

Phase 1: Build a Valuable Company — 19 value drivers and 11 barriers to marketabilityPhase 2: Plan and Prepare for Sale — five core areas that drive value higherPhase 3: Execute Sale Strategy — seven vital steps that must be performed properlyPhase 4: Post-Closing — what seller must do, and should do, after the sale

This is a must-have for every business owner. It clearly displays everything about building value and preparing for a sale at absolute maximum.

Yes, please send me my Best Practice Map: The Path to Absolute Maximum Sale Price (of a Business)3

Order online, or fax or mail this card today!(877) 525-4321 • Fax (918) 493-4924 • AcquisitionAdvisors.com

Make checks payable to Acquisition Advisors • 5727 South Lewis Avenue, Suite 400, Tulsa, OK 74105

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WhERE To FoCUS in 2011

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