Notes from a Business Broker Gathering
This is to provide and discuss a few practice points collected at a recent, mid-August meeting sponsored by the Midwest Business Brokers and Intermediaries associaton ("MBBI").
For background, the membership of MBBI includes business brokers, M&A intermediaries, investment bankers, attorneys, accountants, banks, SBA lenders, valuation service providers, individual buyers, private equity groups and corporate buyers. Members may represent buyers or sellers of businesses with revenues ranging from a few hundred thousand dollars to over $100 Million. In addition to helping business owners confidentially sell or acquire companies, members have expertise in performing business valuations, raising capital and providing financing, legal, and accounting services related to the M&A transaction. More information is available at www.mbbi.org.
The meeting attendees including a number of prospective buyers looking to purchase small manufacturing businesses. The consensus seemed to be that even well-qualified buyers with adequate resources are finding it difficult to locate suitable businesses for sale. It may be that the recession has led to a larger pool of buyers who once were employees, but after layoffs and the like, now want to try to control their own fate by purchasing an existing business.
An informal survey of attendees indicated that even for relatively small deals, it remains most likely that the parties will enter into a "letter of intent" or "LOI" rather than proceeding to negotiate a definite agreement right away. An LOI is a short, preliminary agreement that usually sets out briefly the transaction scope, structure and pricing elements and establishes an exclusivity period. It is similar to a term sheet. It usually is helpful to confirm that the parties are on the same general page, before proceeding to incur the time and expense of due diligence and hasing out all the transaction details. Typically, care is exercised to address the degree to which an LOI is binding or non-binding.
Another key point mentioned was the concept of seller's or owner's discretionary income. Often valuation methods may include a consideration of price to earnings ratio or a multiple of net income. So, under such a method, the higher the income, the higher the purchase price expected. Buyers should be aware that net income for privately held businesses often is suppressed by non-essential expenses incurred at the choice or preference of the owner. For example, an owner may elect to take a higher level of salary, have family members or friends be compensated for services to the business or, with some reasonable business basis, channel vehicle, networking, subscription and other expenses through the operation. Accordingly, buyers should not be surprised when seller's take the position that such expenses should be added to the operating results of the business for valuation purposes.
Jeremy A. Gibson is a Chicago business lawyer with significant experience in the buying and selling of businesses. Please contact us to discuss your merger & acquisition issue or other concern. We are availabe to work with business buyer or sellers throughout the area, including Arlington Heights, Buffalo Grove, Chicago, Deerfield, Des Plaines, Evanston, Glenview, Highland Park, Hinsdale, Lake Forest, Libertyville, Mount Prospect, Naperville, Northbrook, Oak Brook, Palatine, Rolling Meadows, Schaumburg, Skokie, Oak Brook, Oak Park, Vernon Hills, Waukegan, Wheeling and Wilmette.