Fred Rock -FOCUS -Strategic and Operations Planning Issues

Air Date: 5-20-2011|Episode 209

Fred Rock, a FOCUS Managing Director in Pennsylvania, has more than thirty years experience in investment banking...

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Fred Rock, a FOCUS Managing Director in Pennsylvania, has more than thirty years experience in investment banking. He has advised clients on matters relating to strategic and operations planning, including evaluating, financing and structuring new or growing business ventures, as well as executing acquisitions and sales of businesses. Mr. Rock has experience in many different industries, with a significant number of clients in the manufacturing, energy, franchising and distribution sectors.


Z-Man’s Blog:

Rock, Paper, Scissors

Certified Public Accountant and Investment Banker (IB) Fred Rock provided IAQradio listeners with a primer on the ins and outs of buying and selling a business. Investment bankers act as advisors to parties selling or buying a business. They can analyze a business and provide the seller with a range of value. They often know or can identify potential buyers that the seller may be unaware of. They advocate and negotiate for their client. They often have access to financing.

· The ideal time to sell a business is when the “planets are aligned, the business is prosperous and growing, the prospects are positive for continued business growth, the economy is good and lenders are willing to loan money.

· Buyers are purchasing an “economic engine”, “a revenue and earnings stream.”

· Businesses are selling for between 4-6 times EBITA, an acronym for earnings before interest, taxes and amortization.

· Buyers prefer business certainty over business uncertainty.

· Buyers desire businesses with a dominant or unique market position, businesses with strong customer bases and with strong prospects that the buyer will keep the customers.

· Buyers want businesses with margins equal to or better than average.

· Businesses with barriers to entry are more valuable.

· The more important the owner is to a business the less valuable the business.

· Companies that rely on one customer for the majority of their business are risky buys.

· Merger means that there is an exchange of stock. In an acquisition the seller receives cash and can walk away. Sometimes the seller will receive a minority interest which can be problematic as seller may have little say in the operation of the business after the sale.

· Asset verses stock sale. Asset sale has less risk for hidden or unknown liabilities to emerge. Buyers who buy assets can take advantage of tax bases. Sometimes the primary asset of a business may be a lucrative contract which cannot be easily transferred so a stock purchase is preferred.

· Timing of the sale of a business is very important. “Pigs get slaughtered”. Eventually every business will hiccup, the economy may decline and lenders won’t loan money.

· Discretion is important in the sale of a business. Investment bankers use non-disclosure agreements to maintain confidentiality. Stay under the radar as long as possible. Avoid employee concerns and uncertainty that can lead to employees to seek employment elsewhere.

· Investment bankers typically charge a monthly fee and receive a percentage of the sales proceeds.

· To improve business value, sellers should build or invest in a strong management team.

· IB’s are very patient. Bring in an investment banker well in advance of the sale of the business for guidance.

· Investment bankers can provide assistance in transition of a family business. Parents often overvalue the abilities and work ethic of their children. Investment bankers can structure a transaction that finances retirement.

· Entrepreneurs often make poor employees. There is often more than one correct way to do things. Entrepreneurs often become frustrated doing things someone else’s way. 70%-80% of entrepreneurs will be gone in 2 years or less after they sell their business.

· The pitfalls of do-it-yourself business sales. Most buyers are smart and will seize the opportunity of taking financial advantage of a seller. Buyers may string out the seller to obtain leverage; they may reduce their offer by claiming inability to come up with the necessary cash.

· If big companies with all of their in-house resources use investment bankers to do deals, why shouldn’t a small business owner?

· According to Fred, every big financial deal is likely to be led by an investment banker.

Rock, paper, scissors is a game, selling your business is not. Business owners are often strongly emotionally attached to their businesses. IB’s take much of the emotion out of the transaction. IB’s provide a buffer between buyer and seller. IB’s can be the Bad Cop when necessary.

My wife Judee and I vouch for Fred Rock’s professionalism and expertise as he represented us when we sold our business.

Today’s Music: Dealmaker Blues by Brandt Ross

Z-Man signing off