Creative Deal Structuring

CREATIVE DEAL STRUCTURING: EARNOUT AGREEMENTS

Acquisition talks are proceeding smoothly. Then the subject of price comes up. The buyer thinks the seller’s asking price is based on overly optimistic financial projections. The seller believes the buyer’s valuation of his company is far too low. Is the deal dead? Not necessarily. An earnout agreement can help resolve the dispute when a buyer and seller disagree about the seller’s business prospects. They are especially useful when dealing with the unknown — when the target is young and unproven, or it is emerging from a difficult financial situation. In short, earnouts offer a way for the parties to bridge expectation gaps.

business dealUnderstand the benefits

In an earnout, a buyer makes a partial, upfront payment to the seller. With the payment comes a promise to pay the rest of an agreed-on amount if the target meets certain pre-established goals. Meeting these goals generally results in a higher price for the seller, while falling short of the goals may result in a lower price. A well-designed earnout carries advantages for both parties. For instance, the buyer can initiate a transaction with a relatively modest amount of cash. It also can avoid the risk of paying too much for a company unable to deliver on overly optimistic financial projections. Finally, an earnout can help make the transaction more valuable by significantly motivating the seller to achieve its promised results. The seller, meanwhile, can use an earnout to help negotiate a better asking price. An earnout can be particularly helpful when the seller believes that the company’s future results are likely to be much better than its current ones.

Structure the agreement solidly

Whether an earnout succeeds can depend on how well it’s structured. An ill-considered and vague agreement can turn a dispute over valuation into a dispute about the agreement itself. A common problem is drafting an earnout that covers an inadequate period. When this happens, the seller may try to quickly boost its earnings, even at the expense of the company’s long-term financial health. By expanding the earnout period, the buyer can collect more data to evaluate the target’s financial performance. Many experts say an earnout should reflect at least a year’s worth of results and perhaps as much as three years’ worth. Keep in mind, however, that the seller’s business becomes increasingly influenced by the buyer’s management — setting the stage for finger-pointing if the seller fails to meet the earnout’s terms. The earnout also should include the right measures of financial success. Gross sales figures provide one popular measure because they’re more difficult to manipulate than net sales. Net earnings, though a good long-term measure, are subject to many variables and can be misleading over a short period.

Achieve consensus quickly

Even the best-structured earnout needs occasional monitoring. A good way to keep the agreement on track and minimize the potential for later disputes is to include a provision for periodic audits. Audits help reassure the buyer that the target is using appropriate accounting methods and operating its business professionally. A poorly conceived earnout will fail to achieve a consensus between buyer and seller, who may interpret the same facts in vastly different ways. Thus, earnouts often include a dispute-resolution mechanism, such as arbitration, which can be a less expensive alternative to litigation.

Indicators Point to Economic Recovery to Continue Through 2012

Rise in Profits Leading to Increased Small Business Growth

The economy continues to improve according to new data that indicates higher than projected expectations. In a recent Business Week article, many analysts believe that that the second half of 2012 will bring continued growth, which includes areas in consumer and business spending, home building and manufacturing.

Due to many businesses keeping a tight overhead, profits have risen steadily. In the second quarter of 2011, profit rose at a 19.3% annual rate from the previous quarter. Profit margins continued to grow in the last quarter at much higher gains than at the end of the last economic downtown. With revenues projected to continue to increase, many businesses will take the incoming profits and start building their inventories, purchasing new equipment and hiring new employees.

With the latest economic projections, now is the time to look into buying a business. At VR Business Sales, we offer thousands of businesses for sale in all industries. We stand alone in our industry with our decades of experience and innovative tools that have facilitated 100s of thousands of successful business transactions since our inception in 1979.

 

Contact a VR office in your area today to find out how you can take advantage of the market trends as a business owner.

With increased business activity you can also benefit greatly by having your VR Business Brokerage office.
Watch the VR Franchise Presentation Videos for more information.
Then contact VR for more details Toll-Free: 800-377-8722

 

What You Get When You Buy a Franchise | article by JoAnn Lombardi

 

When you are looking to buy a business, a franchise can be a smart investment. Anyone can run a franchise as long as you adhere to the company guidelines.

There are many reasons why you should consider buying a franchise:

Successful Business Model

Established Franchise Brand

Business Foundation in Place with Franchisor

Support from Corporate

Read more about What You Get When You Buy a Franchise

JoAnn Lombardi is President of VR Business Brokers

For more information about owning a VR Business Brokers Franchise please contact our VR Headquarters at 1.800.377.8722

 

 

How To Sell a Business – Training from VR Business Brokers

Article by JoAnn Lombardi, Pres. of VR Business Brokers

All business owners will one day exit their company.  This fact is inevitable.  Therefore the sale or divestiture of the business is one of the most important decisions an owner will ever undertake.

Every step in a business sale demands an extremely specialized effort, and at VR we know that there are no shortcuts to a successful transaction.  Transition to an entrepreneur about to sell a business, means exploring new options in life and making a decision to change.  Owners of businesses view this decision to sell as an opportunity to reap the rewards of years of sacrifice, dedication, and hard work.

Making quick, objective decisions comes naturally to the business owner.  So why is the decision to sell the company so difficult?  Because it’s made by weighing the advantages of moving on against the time and energy that’s been devoted to growing to operation.  The decision to sell a business usually goes far beyond the economics.  It involves defining lifestyle, and redirecting personal energies, resources, and values into the next stage of life.

The VR organization prides itself on recognizing the importance of being a trusted advisor to our clients.  VR intermediaries around the world guide business owners through the transition of divesting their businesses.  Individuals joining VR have made the commitment to a profession that over the next 25 years will aid over ’70 million “Baby Boomers” change from corporate careers to entrepreneurs and from entrepreneurs to retirement.

Hundreds of thousands of businesses change ownership each year, and though the reasons for selling vary, there is one common goal…maximizing the proceeds from the sale.  This is what a VR business intermediary is trained to achieve.

VR defines small business sales as those transactions with a value of less than $2 million.  As you begin your new profession this is the market place that most people gain their experience.  For the past thirty years, twenty percent of the businesses in this value range change ownership ever year.  That’s 1 in 5, in every town, in every city, in every state.  That’s the market and opportunity for successful business intermediaries.

Valued Representation of a business by a VR intermediary is a complex process that is fulfilling emotionally and financially upon successfully completing a transaction.  As a VR intermediary you will be trained in a manner that draws upon years of substantial knowledge, professional experience, and success.

Upon joining VR you will be trained on how to:

  • Build an inventory of quality businesses to sell
  • Value and price a business
  • Formulate different transaction structures to maximize value
  • Prepare a VR Business Profile
  • Confidentially launch a marketing campaign
  • Educate buyers and sellers on the transaction process
  • Recast financial statements for the privately-held company
  • Facilitate negotiations
  • Prepare all necessary documentation
  • Navigate successful due diligence

And of course… how to successfully close business sales!

As a professional VR business intermediary you will manage the process of selling businesses with the goal of successful transactions, while the owners continue to manage their businesses.  You will be an invaluable advisor during the process, offering proven valuation and marketing techniques, along with unmatched negotiation skills.

VR offers extensive training to all of the VR Business Franchise owners. Through the VR training specific methods and techniques on every aspect of being a successful business broker are covered in full detail.

For information on how to become a VR Business Broker and open a VR Business Franchise office, please call (800) 377-8722 or visit Owning your own VR Business Franchise, also visit VR on Facebook  at VR Business Franchise Facebook Welcome page and VR Franchise Facebook Updates.

VR Business Brokers – William Park 2010 Most Valuable Intermediary

 

VR Business Brokers names William Park 2010 VR Most Valuable Intermediary

William Park is the first two-time MVI winner, having previously won the 2008 honor.

Since becoming partner of the VR office in Artesia, California in 1998, William has shared his extraordinary wealth of experience and knowledge with those he comes in contact with.

His leadership, excellence and commitment have helped him and the VR office in Artesia continuously make the Top 10 in the organization.

“I would like to thank VR for this honor of being selected the 2010 MVI,” says William. “It’s a warm recognition in a money-driven industry such as ours. To be successful, you must be disciplined, and your focus should be on setting up meetings with buyers and sellers. A successful day is measured by how many buyers and sellers you spoke to or met.”

William cites a few areas that every VR office can learn and integrate into their practices:

  • Any office can overcome the worst of times when 200+ listings are being maintained such as with the Artesia office.
  • Any office will struggle when the average agent has less than 10 listings. The VR office in Artesia has continued to see most agents’ average 20+ listings.
  • Go after listings that are selling at the time such as food-related businesses.
  • If a new listing is unique to the inventory, get 2-3 similar listings to have a chance at selling one.
  • An associate’s primary focus should be on creating deals, meeting buyers and sellers.
  • An owner’s primary focus should be on breaking down those barriers that distract an agent from their primary focus – “Less paperwork, less computer work, less bureaucracy, more razzle dazzle.”

“It’s not easy to manage as a ‘Sales Leader’ because it’s instinct for owners to worry more about policy managing as an ‘Office Owner.’ Obviously, it would be ideal to strike a good balance, but I prefer the title of ‘Sales Cheerleader.’

William describes being a business intermediary as “something difficult to be great at, but a great thing to be good at.”

We congratulate William Park as the 2010 VR Most Valuable Intermediary.

VR each year celebrates its most successful intermediaries for highest achievements in the business brokerage industry.

To inquire about becoming part of the successful group of VR Business Franchise Owners please contact VR at (800) 377-872.

For more information on opening a new VR Business Brokers Franchise office, please visit Owning your own VR Business Franchise, and also visit VR on Facebook  at VR Business Franchise Facebook Welcome page and VR Franchise Facebook Updates.

VR Business Brokers names Cathryn Vallevieni to VR Hall of Fame 2010

 

VR Business Brokers is proud to honor Cathryn Vallevieni as the 2010 Inductee to the VR Hall fo Fame.

A 30-year veteran in the industry, Cathryn was President of VR Business Brokers when the company operated out of Newport Beach, California from 1991 to 1999 before turning her focus to being a business intermediary in Huntington Beach and then the Passadena offices of VR.

As a VR Business Intermediary, she has won numerous Quarterly and Annual awards for excellence and dedication to her craft, conducting successful transactions of a wide range of business types and sizes.

Her professional interaction with all business brokers in Southern California, resulted in her being asked to be the Regional Chairperson for Orange County by the California Association of Business Brokers.

Ms. Vallevieni is a true ambassador for business buyers and sellers as well as the business brokerage community.

VR congratulates Cathryn for the service she has given this organization and welcome her as the newest inductee into the VR Hall of Fame.

VR celebrates its most successful intermediaries for highest achievements in the business brokerage industry.

To inquire about becoming part of the successful group of VR Business Franchise Owners please contact VR at (800) 377-872.

For information on how to open a VR Business Brokers Franchise office, please visit Owning your own VR Business Franchise, also visit VR on Facebook  at VR Business Franchise Facebook Welcome page and VR Franchise Facebook Updates.

VR Business Brokers Tips – How To Prospect for Businesses For Sale

Knowing How to Prospect Effectively for Businesses For Sale

A successful business intermediary will always meet business sellers and build a strong listing portfolio through using six essential methods of prospecting:

  • Personal call;
  • Telephone call;
  • Direct mail;
  • For sale by owner (FSBO);
  • Referral;
  • Centers of influence (attorneys, accoutants, etc.).

It has been proven that the most effective approach to prospecting is by utilizing a combination of personal and telephone calls with direct mail. The important point to remember when performing this process is the timing and follow-up elements. This is how you will be able to produce results. Selling businesses is not a one-call profession. To be successful, you must do so through multiple conversations with an owner. This is based on the steps of a business owner’s “Ownership Cycle.”

Understanding the “Ownership Cycle”

To correctly prospect, you have to understand that every business owner moves through an “Ownership Cycle.” There are three main phases: Building – focusing on growing the business; Plateau – the business has its momentum; and Selling – deciding to do something different with career.

In each area of the “Ownership Cycle,” you need to determine which phase the business owner is currently in, and when to follow up next. As a business intermediary, you should be introducing each owner to VR as early as possible. This will work beneficially towards both the seller’s and your common goal: a successful transaction.

Every VR office should be fully utilizing their tools available on the VR WebManager (only available to VR Business Brokers).

You can find the professional resources you need to prospect in the following categories when you login:

  • Build your customer base;
  • Build your listing inventory; and
  • Build public awareness.

VR offers extensive training to all of the VR Business Franchise owners. Through the VR training specific methods and techniques on every aspect of being a successful business broker are covered in full detail.

For information on how to open a VR Business Brokers Franchise office, please call (800) 377-8722 or visit Owning your own VR Business Franchise, also visit VR on Facebook  at VR Business Franchise Facebook Welcome page and VR Franchise Facebook Updates.