A. Neumann & Associates, LLC

One of the most challenging tasks business owners face is defining the Fair Market Value of their business. Again and again, questions regarding the various methods used to determine a fair asking price are raised. And, for good reason.  Defining this number is no easy task— there are many variables involved.

A Neumann & Associates, the tri-state’s leading merger & acquisition firm will address this question in a series of seminars across New Jersey, Pennsylvania and New York.  “We are very excited to launch this new initiative for 2012” says Achim Neumann, President of A Neumann & Associates in New Jersey. “Our roster of speakers brings over 25 years of experience and expertise to a multitude of workshops, seminars and conferences throughout the region in 2012.”

“Establishing a realistic value is very important,” says Neumann, as he explained in a Sunday Star-Ledger newspaper article last month.

Working very closely with local Chambers of Commerce and private networking groups, the company will facilitate a series of events, themed “Do You Know the True Value of Your Business?”

These informative seminars and workshops are geared directly to mid-sized business owners and buyers. Specifically, the presentations will address the many ways that a business valuation can be used to benefit the owner. This includes: the proper approach to conducting a valuation; the pitfalls of risky “rules of thumb” valuations and why “back of the envelope” multiples are just not accurate.

“This type of information is key for all business owners to have,” says Gary Herviou, Director Marketing, Central New Jersey.  “Most business owners are consumed with the income and cash flow side of their business. What’s usually missing is the concentration on the underlying asset— specifically what their efforts are doing to the true value of their business.”

Andre Dubbeling, Director of Marketing, South Jersey, adds “Our mission is to bring our real world experience directly to mid-sized business owners.  Every owner should know this information and have it in their toolbox. Andre was recently a featured speaker at the International Business Brokers Association (IBBA) convention in Denver, CO, where ran a workshop-seminar entitled, “How to successfully recruit, train and motivate new brokers.”

The company initially started its roadshow of talks in late 2011, presenting to selected “invitation only” management consultant client groups comprised of 30 business owners in the greater Lehigh Valley.

The company’s next “What is Your Business Worth?” presentation is being held for the Camden County Chamber Of Commerce, slated for Thursday, February 23, 2012.  The morning event will run from 8:30 to 10:30 am and registration is now open.  Details about this and other events can be found here.

“We are excited to see A Neumann & Associates provide our family business owners with some insight into the company valuation process,” says Steve Wolf, Director Family Business, Camden County Regional Chamber of Commerce

A number of future presentations are planned for individual firms, private networking groups and Chambers of Commerce events. Events are typically tailored to meet the individual needs and objectives of the respective organization. A Neumann Associates welcomes inquiries regarding custom talks. To learn more about upcoming presentations, please click here.

As a recent Wall Street Journal article noted, there had been as many incorrect projections for 2011 as there had been correct ones. Thus, we will not even venture to attempt a prediction for 2012, short of noting that the three key challenges transferred from 2011 into the new year are the same: a hobbled housing market constraining growth, many debt-ridden consumers continuing to deleverage, and an uncertain Europe impacting the worlds lending markets.

“The good news, however, for our clients on the buy and sell side, will be low interest rates that stay for a while.” says Achim Neumann, President of A Neumann & Associates in New Jersey. “Any one of the three factors mentioned above will have continued downward pressure on interest rates.”

Indeed, many business owners we talked to will experience a much needed reprieve in costs due to lower rates. Such interest rate reductions apply to many different forms of lending, whether it’s for acquisitions, working capital financing, or simply leveraged business expansions.

In addition, very often such lower interest rates translate into the ability of business owners to renegotiate a better lease for their business with their respective landlords which, also, have more flexibility to absorb lower lease revenues.

“On the buy side, the impact is even more significant,” says Neumann “not only will the buyer or investor experience lower costs in financing an acquisition, but the investor will also have more ‘leverage’ in terms of looking at more investments for any given investment amount.”

Naturally, this impact has not been unnoticed. Investors and buyers of mid-sized businesses still outnumber sellers by a margin of 3 to 1. Returns on stocks, bonds and real estate investments remain weak, so most savvy investors are searching for suitable businesses in a highly competitive market.

“All of our three offices in New Jersey consistently receive calls from highly motivated investors and buyers searching for profitable companies to purchase.” says Gary Herviou, Director, Marketing, Central New Jersey “As a matter of fact, the last two sell-side engagements we accepted were matched with a suitable buyer within less than three months.”

With interest rates this low, little change is predicted– and that is our prediction for 2012!

PRESS RELEASE

A Neumann & Associates is happy to ring in the new year with a number of new announcements including an expansion of its operations with the appointment of a new Director of Marketing, and the launch of a new website redesign.

During this time of industry contraction, A Neumann & Associates is one of only a few reputable mergers & acquisitions and business brokerage firms left in New Jersey with over two decades of experience. Despite the slowdown in the economy, the company has continued to close deals and show profits.

The new site design of www.neumannassociates.com streamlines information and makes it easier for visitors to locate potential businesses and learn about business valuations.

Additionally, the company will now expand into southern New Jersey, as well as Bucks and Montgomery County in Pennsylvania. Currently, with an office in Atlantic Highlands, the company previously served mostly central and northern New Jersey.

In his capacity with A Neumann & Associates, Andre Dubbeling, Director of Marketing, will represent the company within various Chambers of Commerce and other local business networks in southern New Jersey and Philadelphia. His responsibilities will range from establishing the company presence to brokering new deals.

“We are very pleased that Andre has come on board,” says Achim Neumann, President of A Neumann & Associates. “With his affinity for numbers and ability to quickly understand the needs of buyers and sellers, he will be a true asset to the business.”

Prior to his appointment with A Neumann, Dubbeling owned his own successful export management firm for seven years before selling it to his partner. Also, he was previously employed  by a competing brokerage firm, where he quickly rose to a management position. Dubbeling specializes in working very closely with buyers and finding them suitable businesses and commercial properties. He is well versed in orchestrating both small and large transactions. Dubbeling prides himself on “going the extra mile” when putting together deals.

“I am delighted to have joined this prestigious firm. I look forward to solidifying the company’s reputation in the Delaware Valley area. Timing is very important in business, and this is the best time for owners to take a critical look at their business and consider their options. We can help them do that,” says Dubbeling.

“Neumann and Associates has the know-how and the expertise to handle the transfer of business ownership in a manner that both respects the confidentiality of the parties and injects professionalism and rigor to the process” he adds.

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About A Neumann & Associates
A Neumann & Associates, LLC is a professional business valuation and business brokerage firm in New Jersey that assists business owners and buyers in the business transfer process. As President and Founder, Achim Neumann brings more than 25 years of business and management experience from multiple industries. This trusted NJ business broker is the New Jersey representation of Business Brokers Network, a firm with 450 offices and more than 20 years of experience, and with access to thousands of qualified buyers and sellers throughout the U.S. For more information, please contact A Neumann & Associates at 732-872-6777.

Borrowing from a recently revamped Wendy’s advertising campaign, the question “where is the beef” is often translated by business owners into “how will the buyer finance the transaction?”

“In times when financial resources are more limited, a financial structure becomes paramount in facilitating a deal” says Achim Neumann, President of A Neumann & Associates in New Jersey.  “A few years ago, deals would usually consist of 75% cash to the seller and a 25% seller note. Increasingly, we’ve seen changes to this ratio.”

When analyzing a financial acquisition structure further, a lender would quite often contribute 50% to a transaction amount— included in the previously mentioned 75% cash. Additionally, where the industry type might be ONE determining factor in defining the contributing amount, it has increasingly become THE determining factor.

“Businesses that are cash flow-strong and have fewer assets, such as service and distribution businesses, need to be matched with buyers that have a strong net worth position” says Neumann.  “These businesses tend to have less of an asset base that can be used as financing collateral for a lender.”

Most asset heavy businesses, such as manufacturers—and to a certain degree retailers—have sufficient assets in place to allow a lender to find more collateral within the business, rather than looking at the buyer’s net worth.

In an environment marked by more stringent lending criteria, cash flow-based lending is increasingly in retreat and asset collateral, whether from the investor or from the company itself, takes a more profound position.

Somewhat of a mitigating factor is the SBA lending process. However, it is not the cure or a game changer. “Often, we are approached by buyers who believe that the SBA pre-qualification of our engagements makes any acquisition possible, independent of the buyer’s finances” says Neumann, “but nothing could be further from the truth.”

While SBA pre-approval is an important measure for determining the interest level of banks and the underlying financial requirements for a transaction, in the end it will not significantly divert from basic lending parameters.

“Our company has been fortunate during the past three years, that we had no deals rejected on the basis of financing” says Neumann. “It has always been possible to put deals together. Sometimes, it did require a little bit more seller financing, but ultimately, the deal was closed.”

Achim Neumann, President of A Neumann & Associates, LLC
Atlantic Highlands, New Jersey

The leading Mergers & Acquisitions and business brokerage firm in the tri-state region.
Visit the firm at www.neumannassociates.com or call 732-872-6777

We are often asked by clients how we assess Goodwill.  “It must be the most frequently raised issue in the valuating process,” says Achim Neumann, President of A Neumann & Associates, New Jersey, “and indeed from an owner’s perspective, several issues come into play, such as customer and vendor relationships, patents, employees, and so on.”

To understand the concept of Goodwill, it’s important to look at the methodologies used by various valuation companies to establish the value of a company as a whole. Once this is established the components can be broken down.

Typically, a company is valued by a multitude of factors, which can be roughly grouped into balance sheet-based and income statement-based categories. Or more specifically, asset-based and cash flow-based. If the cash flow-based valuation is less than the asset-based valuation, the owner is usually better off liquidating the company’s assets than selling the company as an ongoing concern (setting aside for a moment the discount effect for selling the assets).

“However, generally, the cash flow based-valuation, based on several different methods of assessing cash flow, will exceed the asset-based valuation. In other words, there is a “premium” above the assets, or the Goodwill.” says Neumann.  “Specifically, if the cash flow-based valuation arrives at a value of, say, $6.3m, but the (tangible) assets are $3.9m, then the resulting Goodwill is $2.4m.

One concern business owners have is why there is no Goodwill even though the company has various assets that the owner considers to be Goodwill, such as a customer list, software programs and so on. “Realistically, a buyer will only attribute Goodwill to these assets if they produce cash flow, now or in the future,” says Neumann, “and the focus here is more on ‘now’. But, there are certainly also exceptions, for example, patents or inventions that will create significant cash flows in the future.”

Another issue frequently expressed is the comparison of ratios and Goodwill between a midsized, privately held company and publicly held companies. As a very rough rule of thumb, a price/earnings valuation of privately held companies is close to half of publicly held companies in a similar industry or market sector.

Finally, there is Uncle Sam. “Once there is an agreement between the buyer and seller of a company, it will be important tax wise as to how the Goodwill is allocated,” says Neumann, “as the depreciation rates differ among different asset classes, and consequently, this will have an impact on the future owner’s cash flow.”

Naturally, there are conflicting interests. A buyer prefers to deduct as much upfront as ordinary deductions resulting in ordinary income for the seller; whereas a seller prefers an allocation to capital gain property, which allows a buyer to recover only through tax deductions over 15 years.

Under Section 197 of the IRS code, the balance of the purchase price (aka ‘Goodwill’) which cannot be assigned to cash, receivables, inventory or fixed assets, has an amortization period of 15 years and is considered to be a capital gain to the seller. Goodwill is the value of the business above the asst value, and is based on expected continued customers due to its name, reputation or any other factor.

In sum, given the large number of business transfers and valuations, there is a significant knowledge base with respect to Goodwill and the respective proper treatment in the business transfer process. A Neumann & Associates has advised many business clients in the past ten years to find an optimal solution for both parties and has appropriate experts available to further address issues in this complex arena.

Traditionally, the summer months of July and August have been slow in the business brokerage industry. Buyers and sellers do not have their minds set on transferring businesses during the dog days of summer.

“This year, however, has been quite different,” says Achim Neumann, President of A Neumann & Associates, New Jersey. “We have had a significant number of valuations performed for businesses about to enter the market. The amount of valuations in August alone has exceeded similar timeframes during our best years.”

Possibly, this may foretell better times for business buyers. The ratio of business buyers to sellers has continued to stagnate at 3 to 1 for the past 18 months, based on a national average among the 450 Business Brokers Network’s offices— with many buyers not being able to find a suitable investment.

Where such a ratio in the current economic environment may seem unbelievable to an outsider, the fact remains that more buyers have stepped up due to lack of alternate investment opportunities. At the same time many sellers, due to declining profitability in their businesses, have exited the market.

“Valuations have always been a leading indicator for us,” says Neumann, “and conceivably we could have a change in the business transfer climate given what we have seen in August, despite a difficult business environment.”

Click to See Selected Businesses Here

Achim Neumann is president of A Neumann & Associates, LLC
Atlantic Highlands,
an affiliate of BBN, Dallas, Texas, with 450 offices nationwide.

Visit the firm at www.neumannassociates.com
or call 732-872-6777

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About A Neumann & Associates
A Neumann & Associates, LLC is a professional business valuation and business brokerage firm in New Jersey that assists business owners and buyers in the business transfer process. As President and Founder, Achim Neumann brings more than 25 years of business and management experience from multiple industries. This trusted NJ business broker is the New Jersey representation of Business Brokers Network, a firm with 450 offices and more than 20 years of experience, and with access to thousands of qualified buyers and sellers throughout the U.S. For more information, please contact A Neumann & Associates at 732-872-6777.

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Over the past ten years our firm has been involved in many discussions with business owners considering the sale of their businesses. There are a few particular myths that have repeatedly surfaced during these discussions.

“A typical business owner will sell a business only once in his or her life, and as a result typically underestimates how complex the process is. This understanding is crucial to a successful business transfer” says Achim Neumann, President of A Neumann & Associates, a leading New Jersey Business Brokerage firm in Atlantic Highlands.

Myth #1 – I Can Sell My Business Myself

Many owners believe they’re qualified to sell their business without professional assistance based on the skills they’ve acquired running their companies. Many owners are entrepreneurs with solid selling skills, and many function as the key salesperson for their company. However, what many don’t anticipate is that selling a business is nothing like selling a product or service.

“If you’re looking to sell on your own, confidentiality is immediately lost” says Neumann. “If word of a potential sale gets out, there are definite risks. You could lose clients, employees and favorable credit terms with banks— not to mention managing potential landlord questions.”

More importantly, business owners must ask themselves: is there really sufficient time to run a business while compiling marketing materials, advertising, screening many buyers (and tire kickers), and giving tours? On top of all of this, do you have the time and wherewithal to negotiate a comfortable deal—an adversarial process by nature—plus facilitate due diligence?

These are important considerations strewn with nuances, and all are time-consuming requirements that directly impact the selling price of a business.

Myth #2 – I Know What My Business is Worth

When self-evaluating the value of their business some owners want $100,000/year for sweat equity or will base their price on what they personally need for retirement. Others utilize “industry multiples,” most often some nebulous concept of EBITDA. Yet others just pick a number out of the air.

“None of these self-derived values will carry any credibility whatsoever with the buyer” says Neumann, “nor will it help the buyer’s bank to provide acquisition funding at closing.”

A third party appraisal by a national valuation company is the only solution to a solid understanding of a company’s growth potential, not some vague industry average. It’s surprising, but not uncommon how many business owners expect a buyer to pay several million dollars for their business, yet are not prepared to spend a few thousand dollars for a qualified third party opinion.

“A seller will instantly lose all credibility with any buyer by not being able to present a properly prepared package that includes a comprehensive company appraisal” says Neuman.

Myth #3 – Selling a Business is Like Selling a House

Preparing to sell a house takes a couple weeks, and then word of the sale is spread as far and wide as possible. Once a satisfactory offer is received, the keys are turned over and the seller moves on. No confidentiality, no pre-qualification, no detailed marketing package, no transition time, no seller note.

Selling a company, however, is much more complex. A successful business sale requires a great deal of pre-planning, valuation, cash flow recasting, document preparation, buyer evaluation and so forth.

It takes three to five times as much time to sell a business as it takes to sell a house. And even after the business is sold, the seller can be expected to stay on for at least several months helping the new owner to succeed with the business— thereby securing payback on the note extended to the new owner.

“Sound sale strategies will bring the seller the optimum price the market will bear,” says Neumann. “However, for business owners wanting to cut corners there is a price to be paid, particularly in this competitive environment!”

Achim Neumann is president of
A.Neumann & Associates, LLC
Atlantic Highlands,
an affiliate of BBN, Dallas, Texas, with 450 offices nationwide.

Visit the firm at www.neumannassociates.com
or call 732-872-6777

For the second quarter of 2011 it looks like Main Street and Wall Street will present two very different pictures. While large publicly traded companies are expected to report strong profits, small businesses across the country are still dealing with tight credit, nervous customers and increased costs.

“We still see many small and midsized business owners not obtaining sufficient loans and being very disgruntled with the banks”, says Achim Neumann, President of A Neumann & Associates in New Jersey. ”This is a significant challenge given that small businesses account for more than half of private-sector employment and gross domestic product”

Economic uncertainty and inflationary pressures have resulted in delayed hiring and capital expenditures. Often there are no plans to expand staff  within the foreseeable future, according to a recent U.S. Bancorp survey of  over 1,000 companies in the U.S.. All have with annual revenue of $10 million or less.

Despite 50% of the companies expecting more revenue in a year, 78% believe the U.S. economy remains  in a recession, and many expect it to stay there into 2012.  In May, the optimism index of the National Federation of Independent Business declined. This is now the third month in a row that this has been the case.

One outcome of this environment continues to be a smaller number of businesses being available for sale. “Whereas in the past we have had consistently 1,000 businesses for sale and 1,000 buyers interested in an acquisition in our network, the numbers have changed to 300 businesses for sale, with 1,000 buyers remaining,” says Neumann.  Consequently, any seller contemplating a sale of his business is in an excellent position to obtain the full Fair Market Value for his operations.

And with activities having started to pick up in the second quarter on the sell side, now might be the best time for a business owner to get started. “There has not been any time in the past ten years where buyer inquiries have so significantly outnumbered businesses available for sale,” says Neumann,  “and with a team of thousand professionals in the field we are very well positioned to support business owners in obtaining their goals.”

Achim Neumann is president of
A.Neumann & Associates, LLC
Atlantic Highlands,
an affiliate of BBN, Dallas, Texas, with 450 offices nationwide.

Visit the firm at www.neumannassociates.com
or call 732-872-6777

Quite often, we are asked during presentations which ‘multiple’ is the right one with which to assess the value of a business. Without doubt, most business owners then volunteer that the EBITDA multiple (Earnings Before Interest, Tax, Depreciation, Amortization) is the best single criteria.  However, only relying on earnings can be short sighted.

EBITDA, by its definition removes the elements of financing and accounting decisions by adding back interest, depreciation and amortization and thus, can be used to compare the profitability between companies and industries. Further, it can analyze industry trends over time.

However, EBITDA is not always a good measurement for cash flow– with cash flow being the most vital component for small and midsized businesses to survive. For that matter Operating Cash Flow is a much better criterion to assess cash flow since it includes the changes in working capital– most significantly A/R, inventory and A/P.

For example, relying only on EBITDA as value measurement, an analysis could easily neglect to find an inventory built-up due to poor product design, resulting in an increased need for financing or future margin erosion due to required discounting. Additionally, the need for additional working capital as accounts receivable increase; can cause a significant drain on cash, particularly in seasonal businesses.

Generally, there is no single “rule of thumb” by which to assess the value of a business. Indeed, we caution not to use very often heard ratios such as 50% of annual sales for liquor stores, 1.1 times revenue for accounting firms, 60% of revenue for dental practices or 3 times for software companies, just to mention a few examples.

As a matter of fact, most professional valuation associations do not recognize rules of thumb as legitimate valuation methodologies. Large databases of market comparables, such as Pratt’s Stats, BIZCOMPS or the one of our firm provide a basis for a much more qualified approach.

Typically, a professional valuation is based on numerous criteria, such as an Asset Based Approach, Income Based Approach and Market Based Approach, whereas each approach has several sub-criteria to establish a value. The valuation firms we work with usually take at least eight different key components into account for a value assessment. Then weighting each of the methodologies based on their respective merit to arrive at a Fair Market Value for the business.

Only such a detailed approach will provide the seller not only with a Fair Market Value for his own decision making, but said approach also establishes credibility for the asking price with a potential buyer and with lending institutions funding the acquisition for the buyer. Omitting such a professional valuation will ultimately hurt a seller in more than one way.

Achim Neumann is president of
A.Neumann & Associates, LLC
Atlantic Highlands,
an affiliate of BBN, Dallas, Texas, with 450 offices nationwide.

Visit the firm at www.neumannassociates.com
or call 732-872-6777

by Achim Neumann

What are some of the financial aspects of running a business while selling it? Most owners know more about running a business than selling it, which can be a daunting task by any measure. A business transfer is complicated endeavor, and if not executed properly, runs the risk of losing substantial value in the process. Several major concerns are consistent in each transfer— fair market value assessment of the business and consistent financial performance throughout the transfer process.

A fair market value must first be determined. This is typically the basis of the past three year’s tax returns. Too low an asking price will leave “money on the table”. An overstated asking price, however, will chase buyers away and the business remains unsold for an extended period of time.

Brokerage companies offer valuation services with fees ranging between $3,950 and $7,500 for businesses with $3-10 million in revenues. A business owner should engage only a national valuation firm with the experience of many valuations each year to secure the most current market trends, and the valuation should have a reputation that is being accepted by buyers.

Fair market value is key

As important as determining the fair market value is the consistent financial performance throughout the transfer process. Typically, businesses sell over a period of one year depending on general market conditions, the respective market segment, and viability of the business.

Thus, it is important for a business owner to recognize that any potential buyer will review not only the last three years of the business’ performance by way of income tax returns, but the buyer will also review the financial performance of the business subsequent to said period.

Value loss is a concern

Consequently, it is very important for an owner to continue focusing on the performance of the business and to manage the business at peak financial performance. All too often, business owners “lean back” once they have made a decision to sell their business and have hired a business broker, only to learn that a sale is not progressing as fast as anticipated. Subsequently, the financial performance of the business suffers and when a buyer is finally introduced, the value of the business has deteriorated (relative to the previous valuation).

Most significant in this context is a deterioration of the cash flow, EBITDA, gross margins or a decline in revenues per se. Some buyers also tend to look at changes in productivity ratios such as sales/employee or operating margin/employee.

The Business Broker’s unique role

This particular situation leaves all parties in a very difficult situation: the owner, insisting on the previously established value by the valuation firm confronted by a buyer insisting on a value based on the current performance of the business. The likely outcome will be that the owner will not sell the business.

Good business brokers will try to avert this situation by consistently discussing the business’ performance with the owner, by preparing all marketing materials and advising an owner on the best terms and conditions of a sale. Preferably, a business owner selects a national business brokerage firm that can draw nationwide buyers from many different regions.

3 aspects of selling a business

Selling a business is typically a three part process: the initial preparatory phase for collection of all relevant data, valuation of the business, preparation of a confidential prospectus and development of a marketing plan. During the second phase, the marketing plan is implemented, including financial pre-qualification of potential buyers, interviewing buyers and discussing specific concerns. In the third phase, an offer to purchase is prepared, terms negotiated, the Due Diligence phase initiated, and a final closing performed.

The most important advice, however, always remains the same: with the transparency of the internet today and a business valuation comparison only a click away, a business owner should never neglect running the business at peak performance during the sale period. Buyers will detect very fast if a business has been neglected and will substantially adjust the price offered, or simply shy away from a purchase.

Achim Neumann is president of
A.Neumann & Associates, LLC
Atlantic Highlands,
an affiliate of BBN, Dallas, Texas, with 450 offices nationwide.

Visit the firm at www.neumannassociates.com
or call 732-872-6777