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Fred Wood of Cornerstone Business Advisors Talks Buying Trends

3 min read

Fred Wood has been awarded the designation of merger & acquisition master intermediary and is a certified business intermediary.

Wood received his undergraduate degree from the College of William & Mary in Williamsburg, Va., and law degree from Vanderbilt University School of Law.

He has practiced law at Wright Lindsey & Jennings in Little Rock and then as in-house legal counsel for Alltel Corp. of Little Rock. After leaving Alltel, Wood owned and operated a car wash that led to the launch of the Boomerang Carwash franchise, which grew to 22 locations in four states in less than three years. He sold the business in 2007 and joined Cornerstone Business Advisors.

Q: What are the trends you’re seeing in companies buying and selling businesses? Which industries are consolidating? Which are easiest to find a buyer? Which are hard to sell?

A:  With the exception of the spike in small business closings in the fourth quarter triggered by the fiscal cliff and looming tax hikes, business sales and M&A — mergers and acquisitions — activity have been relatively flat over the past few years. Both buyers and sellers remain cautious. The inevitable wave of baby boomer-owned businesses coming to market has been delayed by political and economic uncertainty, but it’s coming.

Additionally, with both corporations and private equity groups sitting on records amounts of cash, we believe there will be a steady increase in M&A activity over the next several years beginning in 2013. While health care, technology and biotech related businesses are currently garnering more attention, there are buyers for all types of industries. Generally, as long as a company has good, sustainable cash flow, it will sell.

What should a seller have prepared before putting a business up for sale? Are those steps different with a family business?

A seller should implement exit planning strategies that help maximize value by identifying and enhancing value drivers such as key employee incentives, documented processes, excellent financial records and systems, etc. Strategies to minimize taxes are just as crucial. For family businesses planning on transferring the business to the next generation, planning five to 10 years before the transfer is the most important factor to maximize the benefit of those strategies.

How do you set a price for a business? How have they been changing? And what’s happening to the prices?

Businesses are usually priced based on a multiple of historical adjusted cash flow. However, multiple factors — most importantly business trends — can increase or decrease that multiple. The recent recession and continuing concerns over regulatory changes and tax increases have led to lower cash flows and lower multiples, a double-whammy for business owners. Many businesses simply are not being valued at the same level they would have five years ago. A comprehensive business exit strategy is crucial to maximizing the value an owner receives for his business.

Explain how announcing a business is for sale can backfire.

Confidentiality is absolutely essential. If it isn’t confidential, competitors may exploit the company by soliciting customers. Vendors may get nervous about being paid and curtail credit, and employees may leave.

What are common mistakes business buyers make?

Quite often buyers will underestimate the amount of working capital needed for the first six to 12 months of new ownership. They try to buy a company with minimum capital and rely too much on borrowed money. In addition to leaving little margin for error, that approach can severely hamper the company’s ability to grow. The other common mistake is failing to perform adequate due diligence and then being surprised by some aspect of their new business.

What’s your role in the transaction?

We perform two roles: Exit planner, helping owners prepare for a sale or transfer, and broker, managing the sales process for the seller to maximize value in a way that allows him to continue to manage and grow the business while the company is being confidentially marketed and sold.

What about buyer’s remorse and seller’s remorse?

Sometimes sellers have remorse if they have not adequately planned what their post-business life will be. Buyer’s remorse usually occurs when he or she didn’t plan beyond the actual buy/sell transaction and the “dream” of owning his own business. The proverbial dog has caught the car; what is he going to do now? 

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