I received a call from a Chicago business owner (let’s call him “Chicago”) a few months ago. His little home health company was just a couple years old and doing less than $1 million in annual revenue and not yet earning a profit. He wanted some assistance with a transaction.

Cool.

Chicago explained that a buyer by the name of U.S. Medical Home (USMH) of Washington, D.C. was interested in acquiring his company for $2 million. The buyer’s representative was a guy named Mike Keselica. His email address showed him as president of Health Management Group, Inc. with offices in Washington, D. C. and Providence, Rhode Island.

The letter of intent (LOI) terms were confusing to the seller. Sure enough, the deal called for $2 million in cash to be paid to the seller. All good so far. But then the terms went on to say the seller would immediately return the entire amount to the buyer in exchange for a promise to pay said funds back to the seller over a five-year term. No cash at closing! Not a cent until 365 days from closing!

According to the buyer, this structure was necessary to comply with some new tax laws that would be very advantageous for the seller.

Smelling a fish, I asked, “Have you paid them any money?”

Seventy-five hundred dollars for due diligence,” replied Chicago.

“What?” I asked.

“They came and did due diligence and said I needed to pay them for my part of it,” said Chicago.

“Who came?”

“Mike Keselica and Grace Kulik. But don’t worry – the terms of their LOI say if they don’t follow through and purchase they’ll return the seventy-five hundred.”

“Okay. Chicago, what I’m hearing you say sounds concerning to me, to say the least. I’m not sure about these guys.”
Still, there was a purported $2 million at stake so he asked me to withhold my judgment, talk to the buyer, and attempt to negotiate better terms. Surprisingly, the “buyer” agreed to a conference call with me.  The “COO” was Grace Kulik. I called a bit early and a gentleman answered the line, “Health Management Group.” It was Mike Keselica.  Hmmm.

The rest is just amusing. To conclude, they would not agree to any other terms (any that required any payment of cash at closing). Chicago, of course, could not agree to that so he asked for his money back. Naturally, the buyer said they were under no obligation to refund as they offered to purchase for $2 million. The seller is the one that backed out.

If it’s too good to be true…

If there’s a sizeable up-front fee required …

If the buyer or broker uses the need for confidentiality to restrict whom you can talk to…

If the terms are confusing or convoluted …

These are all reasons to be skeptical of the deal you’re being offered. And if you’re unsure about a business transaction, ask a successful and experienced business or legal professional for help. The best way to avoid scams is to exercise your own due diligence.

Caveat Venditor!  Let the seller beware!

• Very active
• Paying premiums
• Buying smaller companies than in the past
• Using less leverage (more equity)

The article is titled, “Private-Equity Firms Forced to Evolve.” Here’s the link.

Acquisition Advisors represents business owners that don’t need to sell — but want to — quietly, professionally, and for absolute maximum. If you fit the criteria and own a business that’s growing and earning at least $1 million per year, we want to talk to you.

Dial 877-525-4321, ext. 2. Confidential

Growth.

Deliver four years of solid, year-after-year growth exceeding 25% and you’ll be the darling of the ball. Every buyer will want to dance with you.

A look at the valuation equation shows it’s elementary:

p = e / (k – g)

where: p = price
e = earnings
k = discount rate
g = growth rate of earnings

The discount rate is also referred to as the required rate of return. Required rates of return for small and mid-size private companies are in the 25% to 33% range. So, if the growth rate is zero, earnings are $100K and the required rate of return is 25%, the value is $400K. Use the same data but a growth rate of 20% and the value becomes $2 million [$100K / (25% - 20%)].

Yes, growth is sexy. Find a way to log four years of solid growth and you will have found a ticket to a premium sale price.

Easier said than done? Of course. To the few go the spoils.

“Private Equity buyers are sharks. They must keep moving to stay alive,” quipped David L. Perkins, Jr., Managing Director of Acquisition Advisors. “Sitting still is not in their DNA. They hunt and they acquire. And because the food is scarce these days they’re more aggressive than ever,” he continued.

Other industry experts are echoing the same. “Prospective buyers are swarming quality sellers,” said Hector Cuellar, president of McGladrey Capital Markets. “Private equity firms have their checkbooks out. They were previously anxious to find bargains – now they just want to deploy their assets as best they can since there is such a lack of quality deals.”

Perkins explains, that private equity groups raise equity from investors and if they fail to deploy the capital, via the purchase of companies, they risk losing the funds. Investors want high rates of return, and if one PE firm is unable to put the monies to work at attractive rates, the capital providers will move their money – to those that can.

Businesses that are performing well today have a great opportunity to sell for a premium today. There is an imbalance of supply and demand favoring the sellers. If you think now might be a good time for you exit quietly, confidentially, and for absolute maximum, call 877-525-4321 to visit with an Acquisition Advisors dealmaker.

Answer: Thank you for your inquiry. I have read the information you provided and given it consideration. First, being in a high-growth “space” is valuable, as are high profit margins, but a couple of things concern me. First, you may be in an interesting high-growth niche, but your business is not growing rapidly. Sure, on a percentage basis, but in real dollars—not so much. Second, your revenue level is just unattractive to all but individual buyers. Larger companies cannot justify spending their time and money to gain just $700K in annual revenue. Yes, you may say it is growing, and if they buy it, they soon will make $1 million in revenue. This does not change things; $1 million in revenue does not “move the needle” for even smaller companies.

Suggestion? If your efforts are to bring real value, you have to continue to grow your revenue and profits. Set your sights higher. If you do not wish to do so, local individual buyers are probably your best bet. Also, be careful! Many firms will tell you what you want to hear to get you to pay them $20K to $50K up front!

WestOak Industries is a highly efficient and profitable electronic manufacturing service (EMS) provider located in western Oklahoma. EMS is a category of companies that design, test, manufacture, distribute, and provide return/repair services for electronic components and assemblies for original equipment manufacturers (OEMs).

Founded in 1973 by J.W. Rosson, the business was being managed by two of the founder’s children. They were also two of the five heirs who owned the business. Several of the family members had little interest in owning a portion of the business and none felt compelled to take it upon themselves to buy out the others. No majority group wished to cause the company to buy back large portions of stock and, importantly, the shareholder that served as president and CEO – while a degreed electrical engineer and with considerable experience in electronics manufacturing and business management – felt the business and its 25 employees would be better served by owners and managers that were more aggressive and well-capitalized.

So, the owners decided to locate a buyer that could pay “top dollar,” commit to maintaining the business in Erick, Oklahoma (where they would lease the family-owned facilities), and had the skill and capital to continue to grow the business. Through their Oklahoma Alliance for Manufacturing Excellence extension agent, Paul Walenciak, they found Acquisition Advisors.

Acquisition Advisors quietly executed its proven process and procured a handful of capable and motivated buyers, the best of whom were the experienced and gentlemanly St. Louis-based buyout tandem of Four-Seven Capital and Harding Partners. They closed, as promised, within 60 days of Letter of Intent (LOI) and tapped one of the family members to run the business. Messrs. Crawford and Harmon will serve as mentors, strategic advisors, and capital providers. The family real estate has a tenant; the employees have a bright future; the one Rosson family member who really wished to continue with the business has been promoted to the position of General Manager; and the gentlemen from St. Louis have a business that should continue to growth and earn healthy profits.

If you wish to buy, sell or value a mid-size private U.S. company, contact Acquisition Advisors. If you wish to learn more about how businesses can be sold quietly, professionally, and for absolute maximum, purchase.

Learn about other successful transactions completed by Acquisition Advisors >>

Answer: There is no such thing. Some advisors or writers will try to “peg” a multiple for an industry, but it’s rather arbitrary, even silly. Some business owners try to think of multiples this way as well. Businesses sell for a wide range of values. Even businesses in the same industry sell for widely ranging “multiples.” This is because:

• Businesses all have unique characteristics. unique combinations of value drivers and barriers to marketability.
• Multiples expand and contract over time due to factors such as changes in the strength of the overall economy; changes in the cost of capital; changes in the supply-demand balance (between buyers and sellers in the industry at any particular time); and the quality, quantity and aggressiveness of buyers at any given time.
• Larger companies sell for higher multiples.
• Business owners go about selling in various ways. HOW a business is sold greatly impacts the ultimate sale price (and thus the multiple).

Similarly, there is no chart that shows industry valuation through the years. Almost all companies in the heat treat industry are private, and neither buyer nor seller releases terms of sale/purchase when deals are done. That being said, businesses in the heat treat industry sell for less than manufacturers of proprietary products, and more than retail businesses and many types of service businesses.

Now, my firm does some proprietary data on a handful of sales of commercial heat treat companies, but the count is too low to speak to the overall market. Even so, the prices as a multiple of EBITDA range from 3 to 6. Based on my experience, I’d say this is about the range a seller can expect for profitable companies in the industry. Three times on the very low side (a company that is profitable but with some real weaknesses) and about six times on the very high side, i.e., a firm with lots of positive characteristics, good diversification, management willing to remain and—almost certainly— solid growth.

Incidentally, several of the selling firms that we have data for did not have an EBITDA multiple because they did not have positive EBITDA. The values as a multiple of sales ranged from 0.3 to 1.25. Again, this is a very wide range of values.

The Wall Street Journal on Friday, in an article titled “Once-Cautious Carlyle Gets in Game,” noted that hedge fund and private equity firm partners are finding significant competition, i.e. lots of competing buyers. The author, Gregory Zuckerman, goes on to explain that buyout firms are widely known to be “fret(ing) about high takeover prices.” Still, one of the biggest in the marketplace – Carlyle Group – is as aggressive as ever. Zuckerman explains that Carlyle is “in the midst of one of the biggest deal splurges in its 23 year history.”

Carlyle is bullish on the U.S. economy and has spent $7 billion so far in 2010 on investments.

A business owner considering selling was in my office Friday asking, “Is it a good time to sell.” Well, it certainly is. We’re experiencing this first hand in the deals we are working now at Acquisition Advisors, and it’s in the news.

Mr. Russell’s comment was in an article that appeared in the business section titled, “Dollar Thrifty Investor Lets Go of 5.5% of Shares.”

The price of a Dollar Thrifty equity share has fallen a bit from it’s high – when Hertz and Avis were battling it out for the right to purchase the company. As the article states, the largest shareholder has sold a majority of its stake in the company. Thrifty threw in the towel last month and, despite that the remaining bidder offers $55.33 per share, shares are now trading around $48.

Russell explained, “Right now, there’s only one serious buyer left. I’m not sure Avis feels the same pressure as when Hertz was in the ring.”

Some things are just not as complex as they sometimes are made out to be. As Fred Russell explains, the value of something is simply a function of what someone is willing to pay and willingness to pay rises when there’s competition. That’s why we at Acquisition Advisors always say, “If a business owner wants to sell and he has just one buyer, who really has whom?”

Does the seller have a buyer or does a buyer have a seller?

The only way to extract maximum value for a business, or any asset, is to identify the “highest and best buyer candidates” and work them simultaneously. One buyer won’t get the job done. That’s why “for sale by business owner” just does not work when the asset is illiquid, such as a private business or real estate.

Business owners, for example, are just not able to do the work required to locate all of the best buyer candidates and then herd them simultaneously through a process. And even if they were, the buyer is not the one to ramrod the process. When the broker or M&A advisor says, “Have your bids in by next Tuesday,” “X dollars is not going to cut it,” or “Hey, seriously, this business is worth X,” he or she is smart and skilled and doing his or her job. When the seller says these things he’s a jerk, greedy, desperate, delusional, or all the above.

Fred Russell knows what drives value. Listen to his advice and you’ll earn higher returns.

Everyone was shocked.

What happened, as the facts came to light, wasn’t misfortune. It wasn’t even unique. Just another instance of a man achieving a high level of prosperity and then, over time, his beliefs about his wealth and his ability to spend grew to exceed even his sizeable income. He developed his own sense of entitlement. His own story of manifest destiny. He began working less and spending more time enjoying the fruits. Flaunting his wealth and exercising his power.

He developed a twisted belief that he was somehow anointed to be, and to always remain, the biggest and the richest.

Of course, he wasn’t. Nobody is. No organization. No company. No country.

Success, fortune, economic future and financial solvency are things not determined by ethereal forces such as fate, destiny or anointment. They are governed by more concrete laws. Success and sustained economic prosperity are earned through the dedicated exercise of the virtues of hard work, sacrifice, diligence, frugality, humility, savings and investment.

When a person or people exercise these traits, the result is economic prosperity. Sure, luck can influence the trajectory and timing, but the formula remains unchanged. The inputs yield the outputs.

When a person or a people fail to exercise these traits, the results are economic erosion and collapse.

A simple review of the historical inflows and outflows of our federal government reveals we spent more than we brought in 74 of the past 100 years and a whopping 45 of the past 50. Intake rose almost every year but spending outstripped it. Deficits in good times and bad. Accelerating accumulation of debt. It occurs for a simple reason: the representatives we send to congress approve deficit budgets. They can’t, or won’t, say no to opportunities to spend. It should be a crime.

It is everywhere. A culture of entitlement. Of immediate gratification. Negative savings rates for U.S. households. Compare this to the savings rates of the Chinese people, and China. A culture of sacrifice, hard work, savings and investment. The inputs yield the outputs. Accelerating economic prosperity in China. Like the U.S. in the 1800s and early 1900s.

I remember how Ted Stephens’* friends and family reacted to predictions that he was headed for bankruptcy. Ridicule. Hatred. And of course many logical explanations of why he’d be okay. But none of the rationalizations were as simple as the indisputable law: spend more than you make and you’ll soon go bust.

Ted Stephens went bust.

^{* Ted Stephens is a fictitious name}