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PRESENTED BY BLACK DIAMOND MERGERS & ACQUISITIONS

The Customer Experience

Hi, this is Robert Edmunds with Black Diamond Mergers and Acquisitions. Today I want to talk to you a little bit about customer experience and why it’s important to your business. First of all, if you think back before the age of social media and all the electronics, if you think back that far people could give you feedback, but they didn’t they really didn’t have access to put their words out in front of hundreds if not thousands of people anytime they wanted to go into detail about your business so the old rule of thumb was is that individuals would, unhappy individuals would tell their story to maybe seven other people when they were unhappy with an experience they might have had with your business now with a click of a keyboard on their phone at lunch or wherever they happen to be they can reach hundreds if not thousands of people to leave feedback and what’s important is to get very passionate around customer feedback and customer experience because in an acquisition situation if you were to sell your business or looking at the value of your business we’re finding the buyers are asking about what is your feedback like online and we’re actually having to you know provide that information for them and they’re very interested that you have really, really good results from customer feedback so you know that’s why it’s very, VERY important so a second part of this is your personal interaction with customers and not being not taking it personal and actually working hard to resolve issues even when you don’t feel like a customer is being necessarily forthright it used to be a rule of thumb that about one and a half or two percent of customers would actually not be truthful in feedback, they were giving you to try to get something out of your company. I learned early on back in former in my former career is to just take those issues, learn from them and do everything you can to make that customer happy because you can’t really tell out of a rate of one or two out of every hundred customers if they’re actually being truthful or not so don’t get yourself in the position of trying to be the judge and jury and figure it out because you might make the wrong decision with the customers being very truthful with you so those are all very, very important and another dimension of this is how much should you actually spend to make a customer happy sometimes it’s nothing it’s just actually listening and having a good set of ears to hear the customer and apologize for the situation they had but if it comes down to trying to correct it and make it right and there’s a monetary amount that is placed on that you can get caught up in thinking about that but I’ll say this that oftentimes it costs more to go out and find a new customer than it does to save an existing customer and a customer that you make happy is willing to spend more with you they’re more committed to you all they’re looking for is you know expeditious service, consistent service friendly service and they’ll be willing to pay more and stay with you for a long period of time so happy to help you here at Black Diamond Mergers and Acquisitions if you’ve got any questions anything we can do for you please reach out and have a great day.

What are Buyers Looking for in Your Business?

What are Buyers Looking for in Your Business?

Hey everyone, I’m Ryan Wagner, M&A Leader with Black Diamond Mergers & Acquisitions here in Kansas City. You may have seen some of our previous videos discussing what buyers can do to prepare for an exit. You know, expectations, what you need to prepare yourself for. Today, I want to talk about the other side of things, and that is, what does a buyer look for when evaluating a business. Why would a buyer pay more for a certain business? Why would a buyer pay less for a certain business?

I spent a good amount of my career before joining Black Diamond on the buy-side, evaluating different types of transactions, evaluating risks. The things I’m going to talk about today are not only important when conducting the day-to-day operations of your business, making day-to-day business decisions. But they are also important in understand what your business could potentially be worth when you go to an exit.

At its core, the value of a business comes down to the risk associated with that business for a buyer. I’ll get into some of what creates more risk for a buyer versus characteristics of a business that are less risky. Other factors come into play like the business industry, the industry that a business is in, a buyer’s knowledge of that space, etc. In general, there’s an inverse correlation between the perceived risk for a buyer and valuation. The riskier an investment, the risker a transaction seems for a buyer, the less they would be wiling to pay and vice versa. 

So, what are examples of things that a buyer could see as more risky? First and foremost is cashflow volatility. If you’re experiencing significant fluctuations year over year in your cashflow, that would be seen as a little more risky versus a business that is able to achieve stable cashflow generation year in and year out. That one is a pretty simple one, but there is a step beyond that which is this concept of recurring versus reoccurring revenue. 

Recurring revenue is something that you can count on year over year, whether that be from a long-term relationship, a long-term contractual relationship where somebody has agreed to buy from you or contract for your services for a longer period of time. That is seen by buyers as very stable, very low risk, something they can count on when they think about taking over the business. Versus reoccurring revenue, in that instance, you may be achieving steady, year over year revenue figures, but you’re having to replace the revenue that you got in a previous year with all new sources the next year. Meaning, you sell a lot of one-time-use products, your service is a one-time service. Your revenue mix is all new clients, all new customers versus recurring revenue where the same customers, the same clients are buying from you for a long period of time. That revenue is more locked in. Reoccurring revenue is more risky because you’re having to go and replace the revenue that you did in the previous year. That’s another form where a buyer would put more risk on reoccurring revenue versus recurring revenue.

Another source of potential risk for a buyer is the management structure. Does the business live or die with the current owners or a key employee? Would the business be able to function if the current owner or key employee was no longer involved? The human element of a business can also add to this risk. A buyer coming in where there’s a solid management structure in place, where the employees are able to do their jobs with limited oversight from owners or key employees is much less risky because they don’t have to go out and figure out the solution, what they’re going to do with the management or the key employees when they take over ownership. That structure is already in place, that’s a much less risky proposition for a buyer versus going out and having to figure out what to do after they take over.

Another one is is the value of your business dependent on future growth? The old adage speaks true here where a dollar today is worth more than a dollar tomorrow. If you have a growing business, it may often seem like a slam dunk for current owners that that growth is going to occur, of course it’s going to occur. Well, a buyer is not going to see it that way. While they may give you credit for that future growth, it’s often going to be at a significant discount to the value they would place on historical or current earnings. Their consideration for growth may not even come in the form of an upfront payment. This is where we see structures like bonus payouts based on future performance, earnouts that get paid once a business achieves certain milestones. Those sorts of things can all be structures a buyer uses to limit their risk when it comes to underwriting significant growth prospects with a business they’re looking to acquire. 

These are just a few simplistic examples of how buyers evaluate transactions and how buyers evaluate risk. There are numerous other factors that go into the value a buyer is willing to place on a business, but, in general, the more risk associated with your business, the less a buyer will be willing to pay upfront. All of these things are important to consider when thinking about an exit. How will my business be perceived? Are my expectations reasonable based on how a buyer would view my business? More often than not, a business owner will have a higher view of the value of their business versus a buyer. So, it’s important to understand how a buyer will look at things so that you can either set your expectations or figure out if there are risks associated with your business, how can we address those?

If you have any questions about your business or want to know how a buyer may look at your company, value your company, feel free to reach out to us. We would be happy to give you an independent look on your business, the risk factors, how the market may perceive your business. We have these conversations all the time with both buyers and sellers, so feel free to give us a shout. I hope everyone has a great day and I hope to talk to you soon. Thanks!

Should I Leave My Job and Buy a Company

Should I Leave My Job and Buy a Company

Christian Baldwin here with Black Diamond Mergers and Acquisitions. Today I want to talk to you about a time to reflect on your current career because between thanksgiving and Christmas and the end of the year, we always seem to get a lot of executives that are working with other companies, maybe they’ve been with the company a long time and their starting to ask themselves, “Is there not something more for me to do? Should I leave me current position and look for something else? Maybe I should buy a company and run that and do something a little bit different that I haven’t done before.” Every year during this time of the year we get these conversations and I wanted to provide five steps that you could maybe go through if you find yourself wondering this holiday season if maybe you should make a change
in your professional career. One of the first things that you can do is really evaluate where you are now. Fully evaluate your current position, what makes you happy, what doesn’t make you happy and all of the things that impact you on a daily basis. The second thing to consider is, do you feel that you could be valuable somewhere else or maybe that you could bring more help to other people doing something
different. The third thing you might consider would be how can your line of work align more closely with the life that you want? So think about that. Your line of work, whatever that might be or maybe if you think about doing something completely different, would that maybe align more with the life that you would like to have? The fourth thing that you might consider is look at things that are going on around
you. Things that maybe your friends or family or other people that you know are doing in your community or somewhere else. Ask yourself where your gifts and talents might align with other activities and there might be an opportunity that’s hidden in one of those avenues that you should explore. And the fifth thing that I would suggest is incorporate your faith. So, these are some areas where if you find yourself thinking this holiday season, maybe you should make a change, walk yourself through these processes and if there is something we can do for you at Black Diamond, please don’t hesitate to reach out. We’ve helped a lot of corporate executives make the transition from a larger company to a smaller enterprise that they can own and grow and in their own words and minds be more successful and have a greater impact with what they feel lead to do next. It never fails that a lot of times what you’ve learned in the corporate world can definitely be put to great use in a private setting with a business that you can own and control your own destiny. There’s some of us on our staff here that have corporate backgrounds and the same exact thing happened to us. So, if there’s something we can do, if you have some questions about that process whether you buy a company or not, we’re here for you and we wish everyone a Merry Christmas and a Happy New Year.

 

Strategies for Dealing with Taxes Associated with the Sale of a Business

Strategies for Dealing with Taxes Associated with the Sale of a Business

Hello everyone, Ryan Wagner here with Black Diamond Mergers & Acquisitions in Kansas City. This month’s video, we wanted to do a follow up to a video that we did a little while back, in which we talked about some of the proposed tax changes that were being proposed by the Biden administration and how those could impact your business specifically in the instance of a sale of your business and how capital gains taxes may be imposed. And how those roles may be changing when it comes to a sale or a transaction of a business. In this month’s video, we wanted to talk about what the specific options are that you have when it comes to minimizing your tax burden, spreading out your tax burden, and then deferring that tax burden over a longer period of time.

 

So, while again, we are not providing tax advice, that should come from a tax accountant or tax attorney, we simply want to discuss that there are some options at your disposal that you can use to minimize that upfront tax burden so that you can maximize what you are taking home as a result of the sale of your business.

 

What are some of these options? First, in terms of minimizing your upfront tax burden, one thing that you can do is, when it comes to the purchase price allocation. Now, a purchase price allocation is done after a buyer and seller agree on a purchase price. That purchase price is then allocated to the specific assets of the business being sold. So, from a seller’s perspective, what you would want to do is try and allocate the purchase price to those assets with a higher basis. Meaning, the assets on the balance sheet that have a higher value than some of the other assets. In this instance, that would help to minimize the gain on the sale because you are allocating a higher amount of the purchase price to assets with a higher basis that’s minimizing the gain.

 

Another option for a seller to help minimize the tax burden is to structure the transaction as a stock sale instead of an asset sale. Obviously from a buyer’s perspective, the buyer would rather structure it as an asset sale because they get to enjoy a step up in basis to the amount that they paid for those assets. So, a lot of times, again, a buyer would like to structure it as an asset sale. Sometimes the seller would like to structure it as a sale of stock or equity to be able to minimize that upfront tax burden.

 

Another option to spread out the tax burden that you would owe is to structure a transaction as an installment sale. An installment sale is simply any time you receive payment for the sale of a business a year after the original close. So, if you said I want to structure the purchase price over three years in an installment sale, you would spread that tax burden out over a three year period instead of paying it up front.

 

There are also several options to defer the tax burden that is incurred upon the sale of the business. One of those options is known as a monetized installment sale. This is a complicated structure that requires a consultation with tax attorneys, tax accountants, but essentially what this is is the sale proceeds are structured as a loan to the seller, as an interest only loan. Those interest payments are matched by payments to the seller from an intermediary. So, at the end of the day, usually that loan is structured as a 30 year loan. What you’re left with at the of that 30 year note is your original capital gain on the sale of the business that you incurred day one, but it’s not due by you or your heirs until that 30 year note has expired. 

 

Another option is something that’s call a 1031 exchange. Many of you may be familiar with this. This is particularly prevalent in real estate transactions. But essentially that is where you are selling one investment property and then turning around and buying another investment property. What the 1031 exchange rules allow you to do is essentially kick the can down the road in terms of that upfront tax burden.

 

Here at Black Diamond we are constantly discussing and finding new ways for our clients to help maximize their upfront proceeds in any transaction. We are constantly talking to lawyers, accountants, other business owners that have structured transactions in many ways so that we can present our clients the best options for their individual situations.

 

If you’d like to discuss any of these structures, any of these transactions, we are happy to do so and happy to get you to the right people that can help you execute and structure these different strategies. I hope this helped you to understand that there are options when it comes to minimizing that upfront tax burden, particularly when it comes to the sale of your business, which can be an important part of the overall consideration.

 

Hopefully this was helpful, hopefully you enjoyed this video. I appreciate you guys all tuning in, thank you.

How will the new tax changes impact my business?

How will the new tax changes impact my business?

Good day everyone.  I’m Ryan Wagner with Black Diamond Mergers & Acquisitions here in Kansas City.  Today’s video addresses a topic that a lot of business owners have asked about, and that is the proposed tax changes from the new administration and how it could impact your business.  The goal of the video is not to provide you with tax advice, but rather to discuss some considerations you need to take into account when you think about a potential exit.

The Biden administration has proposed some fairly significant tax changes, mostly targeting wealthy individuals and large corporations.  Under the proposal, the top income tax rate would rise to nearly 40%, but the main change that affects small business is the proposed change to capital gains taxes.

What are capital gains taxes?  Capital gains taxes are taxes on the growth in value of investments and are incurred when a sale occurs.  Simple example:  I buy a company (or a stock) for $100 and sell it 10 years later for $200.  My profit on the sale is $100.  However, I also have a taxable gain of $100 that would be taxed at the applicable tax rate.  This taxable gain is referred to as a “capital gain” and the current tax rates for capital gains can be up to 20% depending on your tax bracket.  Capital gains taxes are significantly less than income tax.

Under the proposed tax changes, for income in excess of $1 million, the new capital gains tax rate would be nearly 40%.  Now, most Americans do not earn more than $1 million per year.  However, the “capital gain” associated with the sale of a business would count as income under the new proposed rule and any gain in excess of $1 million could be subject to the higher rates.

One other significant consideration is the death of a business owner that passes along to family members.  Under the old rules, family members could enjoy a “step-up” in basis upon death.  This means that if a business was purchased for $100 and is now worth $200 upon death of the business owner, the family member will not be taxed on the $100 gain but would have a tax basis as if they bought the business for $200.  In this scenario, if they sold 10 years later for $300, their capital gain would only be $100 instead of $200 as would be the case if the gain was calculated on the original purchase price of $100.  The new proposed tax changes would eliminate this and would not allow for a “step-up” in tax basis and would create a taxable event upon death.

Now, what does this all mean for my business?  Should I sell now and try to avoid these higher taxes?  The answer, as usual, is “it depends”.  Taxes are an important consideration in all walks of life, but should not be the sole factor in determining whether or not to sell your business.  There are other strategies and offsets at a business owner’s disposal that could help alleviate a tax burden upon a sale.  Plus, you would hate to forego significant growth prospects in a business just to save on taxes.  However, if you have made up your mind to exit your business, we urge you to consider talking with your tax advisor to see what considerations you should think about with respect to these tax law changes.  This could potentially be a one-time event and you want to make sure you are taking home all you can.  We work with a number of CPAs that can help advise you on your options and potential impacts with respect to taxes.  Part of our job as an M&A advisor is to make sure you have the best advice possible given your unique situation.

Thank you for listening in to this month’s video.  As always, if you are thinking of buying or selling a business and need some guidance through the process, don’t hesitate to reach out to us.  We look forward to talking with you soon.

High Level SBA Summary for Buyers

High Level SBA Summary for Buyers

Hi— Christian Baldwin here with Black Diamond Mergers and Acquisitions. Today I want to spend a few minutes talking about the SBA Program and products that are out in the marketplace. There’s a little bit of confusion on the different entities that are involved and what’s really out there and how to take advantage of it if you are buying a business. We run into this a lot in the mergers and acquisitions field because it’s a little confusing as to who does what when the SBA is involved with a lender. One of the things that you need to remember is you still have to deal with a local lender that’s going to loan the money. Therefore, they have the majority say in what happens between your interest rate and things like cash injections and things like that that are going to be required. The SBA really doesn’t lend money per say. They reduce the lender’s risk by providing a guarantee of some portion of the loan that’s going to be used to finance an acquisition. The SBA has a few different programs. They have a micro lending program, and they also have a disaster program that can be used for other things like working capital or replacement of assets in the event of a disaster. We don’t run into those as much doing what we do. We normally fall into two different buckets and that is the SBA 7A program or the 504 program. Now, just to keep it simple today, the 7A program you can think of if you want to buy a business that doesn’t have real estate. So, you’re talking about a business that has good cash flow and probably a high good will value, but not a lot of hard assets. That makes it a good candidate for a bank to use the SBA program in order for the lender to reduce it’s risk in making the loan to the acquirer. The 504 program on the other hand, is designed more for your longer term assets like your real estate and things like that. Now, if you go to a lender and say, “hey I want to use the SBA program”, you still have to through their underwriting process. Typically, they are going to require a minimum of ten percent down on the deal, and that’s a minimum, so the bank can actually say “you know what we actually want to require 15 or maybe even 20 percent down on this particular deal”. Now you can go to the seller and try to get the seller to agree to some form of seller financing, but it really depends on the overall debt service coverage ratio for the entire debt package, primary and secondary, if you have a secondary note. And then if it’s not high enough the SBA may say that the seller note has to be on standby, which means that it can’t be paid until the SBA coverages improve and/or they are paid off first. So, you want to think through that. Now the interest can accrue but sometimes it just can’t be paid until those different ratios are met. So, you want to know that going in so you can use that in your own model and figure out what works best for you. Another thing to kind of keep in the back of your mind is that when you talk to a lender, make sure that they are an SBA preferred lender. This matters because if they’re not preferred the SBA only has two service centers for 7A loans in the United States and so it just takes longer to get through one of those service centers if you’re not using a preferred lender. So right out of the gate make sure you’re using a bank that’s familiar with the program and the key phrase is “Are you a preferred SBA lender?” and if they are then you should be in good hands there and they should know how to navigate this process. There’s a few other nuances that you may come across in terms of the documentation required for the buyer and the seller. There’s a lot of paperwork involved, but it can be worth it because if you went to a commercial bank on the 7A side and you did not use the SBA, you’re probably looking at a maximum amortization on your loan for five to seven years, but the SBA program, one of its key benefits under this 7A lending is that it can go out to ten years. So, there are some great advantages for it if you know the right questions to ask. If you need help in any of these situations, please don’t hesitate to reach out to us. Our team has done lots of these transactions and we’re here to help in any way we can. Thanks a lot, and we look forward to talking to you next time.

What You Need to Know Prior to Selling Your Business

What You Need to Know Prior to Selling Your Business

Hi, this is Christian Baldwin with Black Diamond Mergers and Acquisitions for your free monthly educational video. Today we are going to take a step back and revisit what you need prior to going into the process of selling your business. When you want to sell your business, you can’t just raise your hand all of the sudden and say “I’m ready to sell. Somebody please come and buy my company from me.” Obviously, any buyer is going to need some information and we want to make sure that you are very prepared when you put together this information so that you are organized, and the buyers know that they’re making an investment in a good company and you feel comfortable about the legacy that you’re going to transition to the next owner of your company.

 

There are three major categories when you get to the point when you are ready to sell your business. The first one is some general information that you want to make sure you have in organized fashion: history on the company, when it was founded, information on the current owners, their backgrounds and experience. Basic stuff like that. In addition to that, you might put together your corporate documents. So, if you are a corporation or LLC, your articles of incorporation, operating agreements, that sort of stuff, would be in a file as well. Also, your current cap table is important, which just shows who owns the company and what percentage each owner has. And then an organization chart. That’s just basic information, but it is a necessary step in this process.

 

Financial information. It’s always a good idea to have three years of tax returns available, three to five years of financial statements, which include annual income statements and year ending balance sheets, and year to date financial statements along with the most current balance sheet. Also on the financial side, it’s important to go ahead and include sales by customer and segment.

 

In addition to the financial and general things that you want to include, the market side is important to buyers. So, you want to provide them information on major customers, suppliers, and different products that you may carry. Other than that, if you have competitive information, that’s also going to be something that will be really valuable for someone to take a look at.

 

Those are the three broad categories. You really want to get a head start on this, and if you really wanted to go into detail, you could put together your own due diligence package which could be upwards of 100 or more items which could be organized and professionally done over time. Sometimes that takes longer, up to a year or more, to get that in a good spot. But these are really the basic components of what you need before you sell your business.

 

The process itself looks like going to market, looking for an advisory firm that you feel comfortable with, that you can trust to manage this process and go through this journey with you. What they’re going to do is put together some basic information right up front, gather some things like this on your behalf, and then try to find the right fit in terms of a buyer. Once they find that buyer, whether it’s controlled auction or first one to come to the plate with the best offer that you will accept, they will help you negotiate those terms and proceed normally with a letter of intent. Once you sign the letter of intent, it really kicks of a parallel process of contract negotiation and due diligence. Due diligence again will be way more detailed than these items here, but an advisory firm will help you navigate all that and prepare, present that to the other side’s council and work with you to close the transaction.

 

There can be many forms of consideration, so you can look at cash, owner financing if that makes sense for you, or even an earn out which we are seeing more of these days than we used to in the past.

 

Again, just wanted to take a step back today and say “Okay, if you’re thinking about selling your business, what’s the process look like and what do you need to get ready to do it?” Here are just some broad categories that you can think about.

 

As always, if there’s anything we can do for you, we’re here to help on the sell-side or the buy-side. Anything we can do to add value to your exit strategy and your family legacy, please let us know.

Having Intention and Creating Good Workplace Culture

Having Intention and Creating Good Workplace Culture

Hello everyone,

This is Robert Edmunds. I’m an M & A Leader here at Black Diamond Mergers & Acquisitions in Fayetteville, Arkansas. I wanted to talk to you a little bit today about some ideas around having intention and creating a good culture and workspace. We see a lot of different companies obviously through what we do and there’s cultures that happen by happenstance and there’s cultures that have intention behind them and have good outcomes for the owners and all of the employees. I wanted to give you a few things on a long list of things you can do to have intention around creating a great culture. I’ve got a few things here up on the board, in no particular order that I wanted to go through. One of my favorite is just having an open door policy. Now, depending on the size of your business and scaling these ideas, you have to get this throughout your leadership team. Having an open door policy creates some really good things in the workspace where employees feel like they can come and talk to you about anything that’s going on in your operations and in your business and that’s key to be able to keep your thumb on what’s going on and being able to address those things proactively. I’ve had situations even in my own personal career where I thought everything was great and it wasn’t and having an open door policy where people feel like they can come talk to you is very important.

Another thing is, and this is one that is easily a rule that can be broken and that is equal treatment. You can find that with employees, you might have some that you gravitate to more than others and so you may end up going to lunch with them you may end up spending time on the weekends with them. What that will do is that will percolate throughout the organization and everybody in there will know it and in the end that’s not a great place to be and it’s a hard one to manage but in the end you want to treat everybody the same and you don’t want to be perceived as though you have favorites within your organization. That can really affect morale in a negative way.

Another area of importance is coaching and development for performance and giving people feedback. A lot of employees have never been coached that I’ve come across or given feedback on their jobs and your ability to sit down and coach them through a behavior issue or a relationship issue or how they conduct themselves with customers etc. is very important and not only rewarding for yourself but can be very rewarding for the employee and huge positive impacts can happen out of that alone.

With that comes appraisals. At least once or twice a year, sit down with your employee, minimum at the end of each year and give them an appraisal of the work they are doing. The good things they’re doing and the areas of opportunity for improvement that they need. It’s a really good idea to do a mid-year and a year end.

Another area is one on ones, which is kind of tied into the open door policy, but if people aren’t coming in to talk with you, set up one-on-one time where they can have a safe place to come have an open conversation. Now these things kind of take time to develop and sometimes employees won’t open up to you but you can just ask them how things are going, how are they doing, you know, ask about their family without getting into too much detail but really taking a personal interest in them, setting some time aside on your monthly calendar to reach out and have conversations with those employees that a touch point is very very crucial and that opens up that opportunity again for open door policy and where they feel more comfortable in engaging with you.

The last one I’d talk about is core values. Do you have core values that are published within your company that are posted that everybody can rally around that sets the tone on how you will operate, work together, work with your fellow employees as well as what you look like as the shadow that you cast in to the customer arena and how you hold yourself as a brand? Core values are very very key. So, that’s another area of opportunity.

That kind of wraps it up. I’ve got a whole laundry list of opportunities where you can impact your culture and your business. If there’s anything we can do for you here at Black Diamond please reach out or if you have questions give us a call. I’ll be happy to help you scale this to your appropriate business and have discussions around that. We appreciate it, and have a great day!

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