Mergers & Acquisitions Advisory

A Neumann & Associates, LLC

September 10, 2013

Optimism On Main Street?

By Joseph Eneldas

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“The overall economic outlook is unexceptional, but Main Street is more confident about the future than it has been in years” concludes a recent Wall Street Journal Article [WSJ August 29, 2013]. These findings are supported by a WSJ/Vistage survey as well as a Wells Fargo/Gallup poll, which indicate that a majority of business owners expect revenue and profitability growth in the coming months.

“Indeed” says Achim Neumann, President, A Neumann & Associates, New Jersey. “We have seen a significant upswing in many companies’ cash flows and profit numbers in the recent 6 months. However, we are not certain yet how this will translate into an immediate stronger deal flow.”

Typically, business owners who are not truly in retirement age tend to stay longer in the business when things are good, and tend to express a desire to sell when profit margins are slim. Although this approach might be logical to the business owner, it is in conflict with the buyer’s objectives most notably, that no buyer wants to acquire a business on the down trend. Further, as most business acquisitions are financed, a down trending business is much more difficult to acquire due to the reluctance of banks to finance such a purchase.

Another factor is the expectation on the sell side that the most recent “better numbers” will translate into a significant higher asking price. “This is indeed not the case,” says Gary Herviou, Managing Director, Central NJ, “as investors usually view a broader time span in determining average profitability, and more importantly, in assessing the interest payment coverage.”

This last item is of particular importance: a seller who expects to sell his business based on a six month history of better cash flow, compared to a year ago, will have a significant challenge on hand, as the (relative) increased asking price will translate into higher financing costs, resulting in a considerably lower interest coverage for investors – ignoring for a minute, that the continued growth rate is anything but assured in the coming years.

This is particularly true as the economy is only now very slowly recovering from the recession. Given the significant lower cash flows in the past three years, few investors will rush to purchase a business that is highly priced – with little “security margin. This is truly the case, as many businesses still operate below pre-recession levels.

To quote the recent WSJ article: While small-business confidence is at its highest in years, it is still well under prerecession levels. “Let’s not get too excited,” said NFIB chief economist Bill Dunkelberg, who added that its own confidence index “is still well below the average reading” over the past 35 years.

Ironically, it’s exactly these aggressive sellers who had pleaded “mercy” in the past three years by referring to the “cash flow average” of their “good years”, whereas now the “bad times “ are forgotten and only the most recent six month cash flow appears to count.

Ultimately, only an independent Fair Market Valuation will resolve this dilemma, as such assessment will clearly identify both the strong and weak spots in a company’s performance. Typically, very little time and expense is involved to establish such a key value by way of a national appraisal firm that reviews thousands of transactions for the past three years.

“Last year alone, we conducted over 150 business appraisals, “ says Neumann, “and it’s surprising that there are not more business owners who want to take a hard look at the real value of their operations by way of such inexpensive and fast means.”

As a matter of fact, overpricing will only result in generating a lot of buyer interviews for the seller with no   resulting deal. Ultimately, worse yet, it will expose the business to too many investors that will never follow through with a sale and that could conceivably compromise confidentiality.

All in all, buyers and investors of small businesses will operate with a healthy prudent security margin – an approach a motivated seller should always keep in mind.

 


About A Neumann & Associates, LLC

A Neumann & Associates, LLC is a professional merger & acquisition and business brokerage firm with 30 years of experience in New Jersey, New York, Pennsylvania, Delaware and Maryland that assists business owners and buyers with the business transfer process in a completely confidential manner. The company is affiliated with BBN, with 450 offices and access to a national network of qualified buyers and sellers. For more information, please contact A Neumann & Associates at 732-872-6777

About A Neumann & Associates, LLC

A Neumann & Associates, LLC is a professional mergers & acquisitions and business brokerage firm having assisted business owners and buyers in the business valuation and business transfer process through its affiliations for the past 30 years. With an A+ Better Business Bureau rating, the company has senior trusted professionals with a deep knowledge based in multiple field offices along the East Coast and has performed hundreds of business valuations in its history. The firm’s competitive transaction fees are based on successfully completing transactions. For more information, please contact A Neumann & Associates at 732-872-6777 or info@neumannassociates.com

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“I recently contacted A. Neumann and Associates about getting a valuation of my business done. I spoke with Marc, who explained the process in detail. After meeting with Marc in order to get a clear understanding of my business, and what I was hoping to accomplish. His patience in answering all my questions and his knowledge of the proper way to market my business gave me great confidence that this is the firm I will be using to sell my business for max value. Working with Marc at A Neumann & Associates was very easy and professional. I did not know all that was going to be involved in selling my business but they helped me through the process. What I thought was going to be a just another one of those pushy sales companies was just the opposite. Polite, knowledgeable, and a pleasure to talk to and deal with. I highly recommend this firm to anybody who wants to sell now or down the road. Marc not only knows his stuff, but actually is a real nice guy.”

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“I recently completed an acquisition using A Neumann & Associates. Tony Valentino was very helpful and accessible during the entire process. They do a thorough job vetting both parties and got us to the finish line.”

Srini Mudambi

“Claus out of Florida helped us with the sale of our business. We had never done anything like this and him and his team walked us through the process from start to finish. We had some challenges through the process and Claus continued to show up even in the difficult conversations.”

Colby Harris, Co-Owner, Del Mar Designs

“Claus Madsen thoroughly helped us with selling our company. From the 1st introductory meeting explaining to us what was possible, to providing us with resources to assist with the sale. Claus was invaluable throughout the whole sales process. Claus was with us every step of the journey and always made himself available for any questions or issues that came up along the way. If you are interested in selling your business, I encourage you to reach out to Claus and the ANA team so that they can let you know what’s achievable. These guys will make it happen!”

Ron Harris, Co-Owner and Vice President, Del Mar Designs

“A Neumann & Associates is the only business broker I would use or consult with. They have assisted with 3 business sales over the past 15 years with me. They are honest and sincere and have always performed better than my expectations. They are the only one i would use for the sales of my businesses.”

James Belanger, Business Owner

“I wanted to take a second to commend the exemplary customer service from both you [Karin Neumann] and Mr. Valentino. It’s both a rarity in the industry, and very much appreciated.”

Andrew G., Investor

“We worked with Neumann & Associates to investigate the purchase of a research company in 2010 and found Achim to be capable, forthright and realistic. His depth of experience enabled us to fully understand our options, offering creative options that might enable the acquisition. While we didn’t acquire that particular company at that time, we know exactly who to call whenever we’re looking to buy or sell a business.”

Daniel Coates, Buyer

“Purchasing a business through this firm was a pleasure. Gary was very professional and transparent throughout the entire process. I look forward to working with A Neumann & Associates in the future.”

William Klemens, Buyer
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