How To Sell A Business

Transcription

1 SOFTWARE: Taking the pain out of fixed assets page 26 SMBFINANCE SMALL & MIDSIZED BUSINESS JULY 2006 Don t Sell Yourself Short To sell his company, Hugh Glidewell didn t clean up his books he made the business better. VoIP The bottom line on Internet telephony SMB Finance, PO BOX 530, Congers, NY Address Service Requested: Outsourcing Feel like farming out finance functions? Incentives Creative ways to lower turnover

2 I Am Expertise. I Am Spherion. I am an accounting and finance recruiter with Spherion. Before joining Spherion, I spent five years as a senior accountant for a Fortune 500 company. Once a month, I take a fishing excursion with some of my colleagues. To date, I have helped more than 100 companies find the skilled finance and accounting professionals they need. Who are we? We are a network of talent experts able to rapidly source and deliver full-time financial analysts, CPAs, compliance officers, risk managers and corporate finance experts. Who are we? We re Spherion: nearly 60 years of experience, excellence and exceptional talent. Contact us today at Spherion Pacific Enterprises LLC All Rights Reserved.

3 SMBFinanceMag.com 22 contents DEPARTMENTS 2 Editor s Letter Our July lineup. 4 Eye on Operations Painless tax payments New business credit cards from Discover CFOs own risk management 6 Tech Briefs Sage s new Quantum A network in a box QuickBooks and Web stores Accounting software s triumvirate 9 Benefits Focus Show that you care, with a care-management program. 11 Risk & Regulatory Now s the time to buy business interruption insurance not after disaster strikes. 30 Verticals Inspecting the foundations of the homebuilding industry. 32 Parting Shot Manship Media CFO Ralph Bender on Louisiana s recovery, and the evolution of the CFO. SMBFINANCE FEATURES 12 Preening Yourself for an Acquisition Forget cleaning up the books and slashing expenses: If you want to make your company an attractive sale prospect, you need to concentrate on strategy, timing and growth things a good finance officer should focus on anyway. 18 The Economics of VoIP Phone service over the Internet holds out the promise of rock-bottom prices. Find out if the promise holds true for you. 22 Inside or Outside? Outsourcing financial functions is a hot topic these days but is it right for your company? 24 Anything But Cash The more innovative you are in rewarding and encouraging employees, the more innovative they ll be in their work and the longer they ll stay at it. 26 Software Review: Fixed Assets July 2006 Our reviewer surveys the field of fixed asset software to find the applications that can give you the most help with this often-painful process. JULY 2006 SMBFINANCE 1

4 fromtheeditors The First Year Is the Hardest It s hard to believe that almost a year has gone by since the launch of SMB Finance. We re not big on fanfare, so we ll celebrate the completion of our first year with the knowledge that we re fulfilling our mission statement of bringing you the stories and information you need to succeed in today s highly charged and competitive market. In our humble opinion, the lineup for our July issue does just that. Much like a first date, where the process for making a good impression involves equal parts preening and preparation, priming a business to become an acquisition candidate involves a similar to-do checklist. In this month s cover story, Rich Stolz examines various strategies for making your business appealing to those on the M&A prowl, while presenting some successful examples of owners who made the decision to sell their businesses and how they went about it and how their finance executives were critical to the process. For those of you whose responsibilities overlap with your company s IT unit, you may already be considering a Voice over Internet Protocol system to get cheaper telephone service. In this issue, technology writer Lisa Spinelli helps you determine for yourself the feasibility and economics of transitioning from plain old telephone service to VoIP. No matter what service line your business provides, ratcheting down employee turnover is a universal dilemma. Alicia Korney documents a host of small and midsized companies that have implemented creative, and often low-cost, employee incentives with startlingly effective results. Find out how incentives can translate into that elusive singe-digit percentage in employee turnover. And last, but by no means least, writer and CPA Gail Perry offers up examples of SMBs that ve mined efficiency and lowered costs by outsourcing financial functions such as reporting, payroll and bank reconciliation to various providers. As usual, we welcome your comments and suggestions at smbfinance@sourcemedia.com. One year down here s hoping for many more! All editorial correspondence, manuscripts, etc., should be sent to SMBFinance, SourceMedia Inc., One State Street Plaza, 27th Floor, New York, NY While the utmost care will be given to material submitted, we cannot accept responsibility for unsolicited manuscripts. POSTMASTER: Send all address changes to SMBFinance/SourceMedia Inc., P.O. Box 530, Congers, NY To order, call: (800) , or custserv@sourcemedia.com. Publisher s Copy Protection Clause: Advertisers and advertising agencies assume liability for all content (including text, representation and illustrations) of advertisements and responsibility for claims arising therefrom made against the publisher SMBFinance and SourceMedia Inc. All rights reserved. No part of this publication may be reproduced in any form by microfilm, xerography or otherwise, or incorporated into any information retrieval system without the written permission of the copyright owner. This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is sold with the understanding that the publisher is not engaged in rendering legal, accounting or other professional services. If legal or accounting advice or other expert assistance is required, the services of a competent professional should be sought. 2 SMBFINANCE JULY 2006 Editorial Phone (212) Fax (646) Group Editor Bill Carlino (212) william.carlino@sourcemedia.com Managing Editor Daniel Hood (212) daniel.hood@sourcemedia.com Contributing Editors Paul Demery, Stuart Kahan, Melissa Klein Aguilar, Carolyn Hirschman, Ted Needleman, Gail Perry, Roger Russell, Jeff Stimpson, Richard Stolz, Howard Wolosky Design Creative Director Justin Torrento justin.torrento@sourcemedia.com Art Director Mike Vella michael.vella@sourcemedia.com Associate Art Director Gillian Reinhard gillian.reinhard@sourcemedia.com Executive Director of Creative Services Sharon Pollack Production Production Manager Brooks Rice brooks.rice@sourcemedia.com Executive Director of Manufacturing Stacy Ferrara Advertising Group Publisher Tim Murphy Advertising Sales Director Jack Lynch (212) jack.lynch@sourcemedia.com Sales Managers Collene Ellenberger (212) collene.ellenberger@sourcemedia.com Kurt Martin (212) kurt.martin@sourcemedia.com Patrick O Leary (212) patrick.oleary@sourcemedia.com Classified Sales Manager Peter Sorice (212) peter.sorice@sourcemedia.com Sales/Marketing Associate Susan Korcynski (212) susan.korcynski@sourcemedia.com Group Circulation Director Michael O Connor (212) Fulfillment Director Jessica Reid (212) Customer Service custserv@sourcemedia.com Phone (800) Fax (212) James M. Malkin Chairman & CEO William Johnston Chief Financial Officer Jeff Scott Chief Technology Officer Bruce Morris Pres., Banking & Corp. Groups Frank Quigley Pres., Securities Group Celie Baussan SVP, Operations Robert DeNoia VP, Human Resources Richard Antoneck VP, Finance Anne O Brien EVP, Marketing & Strategic Planning REPRINTS/WEB RIGHTS/PERMISSIONS Godfrey R. Livermore Director of Reprints & Alternative Media Sales Tel. (888) Fax (212) godfrey.livermore@sourcemedia.com

5 Checkpoint Corporate Reporting & Compliance We use Checkpoint for critical financial reporting, SOX compliance and corporate governance answers from names we know and trust like WG&L, RIA and now PPC. Best of all, everything on Checkpoint is linked together, so now we can easily get from all our key source materials SEC, GAAP, FASB, GASB, AICPA, IASB, even COSO to the guidance and analysis we need to get the job done. Since everything is in one place, we find what we need right away. Even updates we can t get anywhere else, like PCAOB Interim Standards and daily news s. All the financial tools we need for our company are right here, on Checkpoint. NEW Resources for Corporate Reporting and Compliance Over 85% of the Fortune 1000 rely on Checkpoint for their research needs Only on Checkpoint from RIA and PPC. Checkpoint is one of the leading accounting research platforms available and relied on by over 90% of the Top 100 Accounting Firms The CPA Technology Advisor [2004, 2005, 2006] Research Guidance Workflow Tools CPE ppc.thomson.com ria.thomson.com/frm/corp 2006 RIA. RIA and Checkpoint are trademarks used herein under license. PPCRIA_CORP_ACCTTECH06/06

6 eyeonoperations IMAGE PUNCHSTOCK FASB, AICPA eye private co. reporting The Financial Accounting Standards Board and the American Institute of CPAs have issued a proposal aimed at improving the financial reporting process for private companies. The groups are asking for feedback on changes to FASB s standard-setting procedures, which would allow the board to consider differences in accounting standards for private companies within generally accepted accounting principles. Under the proposal, FASB would implement certain improvements to enhance the transparency of its standard-setting process for private companies and consider input from private company constituents. The seven-page proposal is available at a joint Web site maintained by the two groups, The comment period, which is open to anyone, ends August 15. Painless tax payments Well, as painless as possible: Under new temporary and proposed Internal Revenue Service rule changes, nearly 950,000 small businesses are eligible to file and pay taxes once a year using the new Form 944, rather than quarterly using Form 941. Eligible businesses are those with an estimated employment tax liability of $1,000 or less. Discover targets small biz Discover Financial Services, a business unit of Morgan Stanley, is the latest company to try to secure a piece of the business credit card action. It is targeting businesses with up to $1 million in annual revenues, estimating that only 35 percent of small-business owners have a business credit card. The new card has a feature allowing business owners to write special checks to pay merchants and suppliers who don t accept credit cards. The card doesn t carry an annual fee and includes a cash-back rewards program on office supplies, gasoline and other purchases. More information is available at An owners retirement plan CCA Small Business Group, a provider of retirement plans for sole proprietors and small businesses, has unveiled its new OurMax plan, a Web-enabled, high-deferral retirement plan for small business owners. A type of defined-benefit plan that allows business owners to save up to $200,000 annually for retirement, CCA s OurMax can work in addition to an existing 401(k) plan. More information is available online at SBA loans face challenges While the Small Business Administration has improved oversight policies and controls for its flagship 7(a) loan program since the 1990s, the organization still faces a Because your plate wasn t full enough Corporate success has a thousand fathers, but corporate risk has to make do, at best, with one and it s often a company s chief finance executive. According to a recent survey of 230 financial executives by internal controls software vendor Oversight Systems, if a company held a single executive explicitly responsible for overseeing the management of all risk across the enterprise, CFOs were more than twice as likely to be tapped for the task than CEOs. series of challenges in its loan program, according to a report from the Government Accountability Office. The report said that with respect to using technology to monitor loans made by 7(a) lenders between 1997 and 2002, the SBA had been unsuccessful in developing its own system to establish a risk management database, as required by law. Meanwhile the GAO s preliminary findings from ongoing evaluations of the SBA s response to the 2005 Gulf Coast hurricanes indicated that the SBA s workforce and new loan-processing systems were overwhelmed by the volume of loan applications. Filthy accountants Of the more than 600 cubicles in nine different professions examined by researchers from the University of Arizona, the bacteria levels found in accountants offices finished second only to the levels found in schoolteachers classrooms. Dr. Charles Gerba, a microbiologist at the University of Arizona, said that the phones, desks and keyboards regularly used by teachers, accountants and bankers harbored nearly two to 20 times more bacteria per square inch than other professions. Who owns the risk? CFO 44% No Single Executive 14% CEO 20% SOURCE: OVERSIGHT SYSTEMS Other Executive 9% Chief Auditor 5% Chief Risk Officer/ VP of Risk 8% 4 SMBFINANCE JULY 2006

7 Driving the Success of Small and Midsized Business Our readers buy your products and services and we've got the results to prove it! Within the next 2 years, SMB Finance readers intend to purchase the following products and services*: > 45% Copiers/Scanners/General Office Equipment > 33% Accounting/Finance Software > 31% Accounting/Auditing Services > 31% General Hardware/Software > 31% Employee Benefits > 28% Insurance > 22% Bank Relations > 20% 401k/Pensions/Defined Contribution Services > 20% Phone Systems > Reach 60,000 > > influential financial executives who look to SMB Finance for information about new products, services and solutions. 86% 60% of our readers either of our readers say make or influence their company plans to final purchasing INCREASE technology decisions*. spending*. *March 2006, Publisher survey results For more information, contact: Jack Lynch, Advertising Director (212) jack.lynch@sourcemedia.com Collene Ellenberger (212) collene.ellenberger@sourcemedia.com Patrick O Leary (212) patrick.oleary@sourcemedia.com

8 techbriefs up fee of $59.95; prices for Web store plans small and midsized accounting and enter- Sage rolls out Peachtree Quantum range from $7 a month up to $250, depending on the provider. prise resource planning software markets. However, the Boston-based firm did note that integrated business application In conjunction with the launch of the Peachtree by Sage Accounting 2007 line, TaxWare certified for SSTP suites from NetSuite and SAP also gained increased presence and penetration. Sage Software has announced the new Taxware, a provider of global transaction The report says that the market oppor- Peachtree by Sage Quantum, which can tax calculation and compliance solutions, tunity for vendors is growing. Many SMBs support up to 10 named users in delivering announced that its flagship products still maintain and manage their financial additional performance, data security and Taxware Enterprise and TaxSolver have data on Excel spreadsheets, which pro- larger transaction volumes. been certified by the states that are mem- vides vendors with opportunities to seize More than 150 small business owners bers of the Streamlined Sales Tax Govern- greater market share. Additionally, the participated in usability and design studies ing Board. Taxware is the first company to increasing need to electronically exchange conducted by Sage s in-house Customer- gain both Certified Automated System and information with larger customers and Connected Design Center. Included in this Certified Service Provider status, providing partners adds to the demands to improve information gathering process were businesses with a choice in how they wish operational efficiency. Peachtree customers, small businesses to deploy certified sales tax compliance Within the market, the Yankee Group that utilize paper and pencil to manage technology. Both models protect business- said that Intuit s QuickBooks and Quick- accounting, and customers of competing es from liability through the use of state- Books Online still dominate companies accounting software packages. supplied data and ongoing testing and re- with between two and 99 employees, fol- More information about Quantum is certification testing by state regulators. lowed by Sage Software. Microsoft leads available at the 100-to-999 employee midsized comp- Sage has also rolled out new versions of its Peachtree software for the construc- Easy networking any market, followed by Oracle and Sage. tion, manufacturing, distribution and nonprofit industries; information is available at Not everything in life or IT has to be hard. Take Chili Systems ChiliBox, a network server appliance for small businesses that Warehouse Automation for MAS 500 makes setting up a network for a small Business software developer Sage Minding the e-store office or even a home simple and painless. The ChiliBox server links from two to 20 Software unveiled a new Warehouse Automation module for its Sage MAS 500 Just as QuickBooks makes accounting easi- computers, and acts as your router, ERP enterprise resource planning software. er for small businesses, Intuit s new server, firewall, back-up server and more. Intended for distribution companies that QuickBooks Merchant Service for Web It even allows for secure remote access use wireless networking equipment, the Stores ( over the Web, and now comes in a wire- module transfers data gathered from hand- should make e-commerce easier. Intuit has less version. held barcode scanners and radio frequency partnered with leading online store For more information, visit communication devices and enters it auto- providers to create an end-to-end, tems.com or call (866) matically into the Sage MAS 500 ERP sys- QuickBooks-compatible solution that lets tem. Handheld devices supported by the businesses create a Web store, sell online, accept credit card payments and link all the business data directly with their QuickBooks accounting software. There s a monthly fee of $17.95 for the QB Merchant Service, plus a one-time set- Accounting software ruled by triumvirate Market research firm the Yankee Group announced that Intuit, Sage and Microsoft have reconfirmed their dominance in the Warehouse Automation module include the Intermec CN2 Series, the Intermec 700 Series, and the Intermec CK60 Series, plus any handheld device utilizing Microsoft CE.Net or Windows Mobile 2003/2005 operating systems. IMAGE ARTVILLE 6 SMBFINANCE JULY 2006

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11 premiums have forced many of them to raise employees costs or to eliminate coverage. This cost pressure has prompted some small employers to look for long-term watch larger savings employers with care-management Others, programs. however, have decid1(k)s. plow the field. Such That s programs what MMany aren t small as common and midsized companies are as at taking large a ones, measured but at small their approach use is to growing. the buzz Among over consumerdriven 10 health to 499 benefits, employees, preferring 41 percent to employers with offered watch larger at least employers one disease plow management the field. program Others, however, last year, have compared decid1(k)s. with 31 percent That s in 2004, what reports MMany Mercer small Health and midsized companies Nurse advice are taking lines a were measured offered & Benefits. by approach 41 percent to the in buzz 2005, over up from consumerdriven in health The benefits, proportion preferring usingto health-risk watch larger assessments employers plow rose from the field percent percent Others, however, to 18 percent. have decid1(k)s. Wellness That s what programs MMany strive small to and prevent midsized companies workers from are developing taking a measured diabetes at-risk and approach other to chronic the buzz diseases. over consumer- Disease benefitsfocus You re Never Too Small to Care Care management s not just for the big guys anymore. By Carolyn Hirschman IMAGE PHOTODISC It didn t take a fancy claims analysis or much shopping around for John Keach to add a wellness program to the employee benefits offered by his small bank. He Many signed on small when and the bank s midsized health companies are company taking a offered measured the program. approach to insurance the We buzz just over thought consumer-drive it made sense, approach says the to the chairman buzz over and consumer-driven chief executive of health 280- person benefits, Home preferring Federal to watch Bank in larger Columbus, employers Ind. We plow thought the field. it would Others, be however, have to control decid1(k)s. [health] costs, and it was a good way a way That s to provide what MMany additional small and benefit. midsized Care companies management are taking isn t just a measured for big companies. approach to An the increasing buzz over number consumerdriven employers health benefits, are adding preferring wellness, to dis- of small ease watch management larger employers and similar plow the services, field. even Others, as however, some drop have basic decid1(k)s. health coverage. That s what MMany small and midsized companies THE CASE are taking a measured MAKING When approach it comes to the to buzz health over benefits, consumerdriven health have benefits, rough. preferring Their fast-rising small employers to JULY 2006 SMBFINANCE 9

12 benefitsfocus management helps ill people better manage their conditions so they don t get worse. Weight-loss programs and management of complex and catastrophic cases are also part of the mix. Many employers offer these programs to save money, but saving money isn t the only reason to offer care management, especially since programs often don t yield a return on investment for two years or more. Firms also want to boost employee health and productivity and to create a caring culture. We thought it was important to let our employee population know their health care was important to us, says Valerie Witt, a benefits specialist at Johnson Memorial Hospital in Franklin, Ind. The 850-employee hospital added a wellness program last year to keep its benefits competitive with those of other area hospitals, she adds. We did a lot of communication at the beginning, Witt says, because some employees were concerned about confidentiality. WHERE TO START To pick a cost-effective program that s best for your workforce, first determine your needs based on employee demographics and medical-cost drivers, experts say. Most small groups should focus on wellness for all workers, rather than disease management for a relative few, says Jack Bastable, who heads the health and productivity management practice at CBiz Inc., a Cleveland-based business-services administrator. The greatest savings long-term come from the opportunity to keep people who are healthy from getting sick, Bastable explains. At a minimum, companies can distribute or guide employees to free health information and host seminars with local health professionals. A full-fledged wellness program typically includes on-site clinical screenings for blood pressure, cholesterol, body mass index and other basic indicators of health-risk assessments, in which people self-report smoking, exercise and other habits; one-onone consultations to explain results to individuals and suggest changes, such as weight loss or more exercise; a report of Not just for the big guys Percentage of employers offering wellness programs ALL SIZES SMALL (1-99 EMPLOYEES) MEDIUM ( EMPLOYEES) LARGE (500 OR MORE EMPLOYEES) 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% aggregate data for the employer to guide future wellness efforts; and a healthcoaching program to motivate and guide lifestyle changes in workers at high risk for chronic conditions. We really don t recommend just one of these, says Chas LaPierre, director of Principal Wellness Co. in Indianapolis. Without all those things, you re really just adding to the cost of health care. For disease management, employers can analyze medical and drug claims to figure out which programs to offer, but the effort is justified only for groups of 500 and up, which are large enough to generate reliable numbers, says Joseph Marlowe, Aon Consulting s vice president of health and welfare. Most large national carriers offer disease-management services as part of their health plans, but it may not be a comprehensive program. It may be limited to case management, he adds. Consultants and brokers can help small companies assess program quality before diving in, Marlowe says. Aon, for example, has negotiated a small-business price for disease management with Matria, the vendor it has used and vetted for large employers. Whatever the program, incentives usually, lower health premiums help drive participation. Home Federal Bank reduces workers premiums by $40 per month and gets 95 percent participation in its program, plus a 3 percent lower health insurance premium, Keach says. 48% 62% 61% 76% SOURCE: SOCIETY FOR HUMAN RESOURCE MANAGEMENT SHOPPING AROUND Care-management programs historically haven t been available to small firms, but that s starting to change, consultants say. Providers pool the business of small groups, making programs more affordable for small businesses and more profitable for vendors. Still, options may be limited. Employers that buy health insurance from Principal Life Insurance Co. get its wellness services for free if they reach 75 percent participation in the wellness program, LaPierre says. Otherwise they pay a variable rate. Self-insured companies generally buy care-management services on a permember basis through a third-party administrator, with disease management costs varying by program. Johnson Memorial Hospital pays Principal about $12 per member per month for its wellness program, Witt says. To judge a program s success, compare participants average number and cost of medical claims before and after the program began, Bastable says. Vendors also regularly report participation rates, aggregate clinical data and other information for employers. We also want to see behavior change trend the right way. We can track that, LaPierre says. Did more people participate in high-risk interventions, for example? He advises waiting at least two years to judge wellness results. It s not a quick fix, he says. SMB 10 SMBFINANCE JULY 2006

13 risk&regulatory IMAGE PHOTODISC Business interruptus Don t wait for the big one to hit before buying business interruption insurance. By Roger Russell Most businesses are ignorant of the need for business interruption insurance until it s too late, according to experts. Many companies don t pay attention to business interruption insurance at all, said Robert D. Chesler, an attorney and chair of the insurance law practice group at the Roseland, N.J.-based firm of Lowenstein Sandler PC. The basic coverage you get is very thin. Business interruption insurance is critical to us because of our multiple sites, explained Tiffany Hott, chief executive of TestQuest, a tutoring and testing service with locations in New York, New Jersey and Florida. Insurance costs have skyrocketed, but you can never foresee every unexpected possibility. You can never be over-insured, but you have to balance the cost against the risk. Business interruption insurance covers the profits that would have been earned and operating expenses that continue despite the absence of business activities due to a casualty, according to Michael Levy, chair of MostChoice.com, an Atlanta-based lead-generation service. Water is one of the most common causes of physical damage to businesses today, he said. A severe but rarely considered cause is sprinkler discharge. Sprinklers can go off easily.... Gutters can clog and cause an overflow. Computers and other electronic devices such as phone systems can suffer serious, irreversible damage. SCATTERED COVERAGE Chesler, who advises companies on their insurance programs, noted that not every contingency is covered in such policies. The best advice is to go over a policy very carefully, and make sure it matches potential injuries to the business. After 9/11, a lot of companies were surprised they didn t have it. Business interruption coverage is typically not sold as a separate policy, but is added to a property insurance policy or included in a business insurance policy as a rider or an endorsement. For smaller businesses it can be sold by itself, but it s usually rolled in with a general business insurance or property insurance policy, explained Robert P. Hartwig, senior vice president and chief economist at the New York-based Insurance Information Institute. You need to make sure that it s part of the business or property policy, he emphasized. About 85 percent had it after 9/11, but many did not have enough. Their assumption was that they didn t need more than two or three weeks worth of insurance, but they did not envision a terrorist attack that kept parts of the city cordoned off for weeks. In practice, policies contain elements that make it difficult to determine whether a specific loss is covered. A business interruption policy usually requires physical damage as a trigger, but in today s world e-damage is often a trigger. There s no coverage for it unless you have it endorsed, said Chesler. He also noted the fine line between a partial shutdown and a slowdown or productivity loss. The partial shutdown is typically covered, while a productivity loss is not. PICKING YOUR POLICY It s critical that businesses assess their needs in the event of a business-suspending incident, said the III s Hartwig. Many businesses buy enough to repair or rebuild their buildings and restore inventory, but do not have enough coverage to tide them over the loss of income and higher expenses, he said. Among the factors to consider in selecting coverage is the financial strength of the insurer, the size of the deductible and the amount of the premium payments. And now may be the time to buy. Nationally, business interruption insurance pricing is soft, said Trey Hutt, owner of the Hutt Insurance Agency in Panama City, Fla. It s fairly soft now nationwide, but it s very different along the coast, and that s growing. The hurricane issue is working its way up along the East Coast. SMB JULY 2006 SMBFINANCE 11

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15 Caveat vendor: When it comes to selling a business, you have to do more to get your ducks in a row than just smooth out your ruffled financials but knowing how to make your company an attractive prospect can be a real feather in your cap. By Rich Stolz Preening yourself for an acquisition Photography by James Warwick/Getty Images JULY 2006 SMBFINANCE 13

16 Picture the scene: Your chief executive invites you into his office, shuts the door firmly behind you and asks you to take a seat. You know something s up. Then he lowers his voice and says, I m thinking about selling the business. Can you help me through this process? You swallow hard, think quickly about your future, then possibly with manufactured self-confidence reply, Sure. Your ability to be useful will not only greatly influence the success of the transaction, but perhaps determine whether you land on your feet after the deal closes. Indeed, the sale of a business may represent the ultimate opportunity for a financial executive to demonstrate his value to the organization and its shareholders not to mention future employers, including the new owners of the business. Conversations with business brokers and owners make one thing very clear about what s required for a smooth business sale: It s not really about having clean financials. My belief is, you can t clean up the books, says Jeff Snell, president of Enlign Business Brokers, in Raleigh, N.C. The whole notion is hokey to me. If I m looking at three years of accounting data and the owner is saying, We have this note here, or We have this customer who pays cash, or I use multiple accounting systems that never get integrated into a final report, he s really doing that because he s washing something out of the system. Odds are, a jury-rigged accounting system really can t or won t be cleaned up. When Snell sees the telltale signs, I m not likely to work with them. Adds Patrick Harkins, who spent over 20 years as a chief financial officer before launching Anchor Business Advisors Inc., in Atlanta, clean books are a given. You d better hope you re generating good financial information; otherwise you ve got a whole set of other problems. THE EARLY BIRD TAKES HIS TIME The biggest requirement for a successful sale isn t even financial. It s time. I like to start working with a company two or three years before the sale, Harkins explains. And it is during that period that financial executives (and perhaps others on the senior management team) can take the steps and perform the analyses that will help the sale succeed. One of Harkins clients is Hugh Glidewell, who came to him two years ago with the notion of selling Pro Landscapes, a $12 million, 60-employee Atlanta-based regional commercial landscaping business that he had been building from the ground up since I had vaguely thought about selling the business for a year or two before I met Pat, he recalls. After some 30 years of working in the landscaping business, and a dozen years in Atlanta, Glidewell concluded that he might like a little change of pace. I had been struggling mightily at this business, and for whatever reasons, the business had become more successful than I had ever really dreamed. Although Glidewell didn t relish the financial management end of the business, his systems were in good shape due in part to the fact that securing commercial landscaping contracts often requires posting performance bonds. The bonding companies were very strict about getting the kind of detailed financial information that a prospective purchaser (or broker) would demand, Glidewell says. But when Glidewell began discussing the possible sale with Harkins, he quickly learned what a strategic-minded and analytical financial executive could do to help him fetch top dollar for Pro Landscapes. I was very tied up in the day-to-day operations of the business; the larger, macro things you tend to get to rather slowly if at all, he says. GO FOR THE TWO IN THE BUSH And yet those macro things tend to be the ones of greatest value to buyers. People buy businesses because they feel they can expand them pretty significantly. Otherwise, why not just buy a risk-free government bond? Harkins asked. When he sought out the financial expertise of Harkins, Glidewell believed that he had already done about as much as I could to position the company for a sale. And he had good reason to think so: Pro Landscapes had racked up a very impressive financial track record. After its first year of operation, the company grossed about $1 million. After a dozen years, its gross exceeded $12 million (with an average annual growth of about 23 percent). In addition, Glidewell s operating margins remained consistent, so profit growth was as impressive as the top-line picture. But Harkins wasn t content to let Pro Landscapes rest on those numbers: As a CFO, you really have to help the CEO think strategically. When he served as CFO of a middle-market manufacturing company in Chicago, Harkins helped to facilitate a leveraged buyout of the company by the management team. Before approving the loan needed to swing the deal, the lender required managers to work with a business strategy consultant. In that process, Harkins and others analyzed the company from top to bottom, clarifying which pieces of the business were truly profitable and had growth potential. The ultimate result was a consolidation of divisions and the curtailment of some operations. The loan was approved, the deal was consummated, and we paid off the debt pretty quickly, Harkins recalled. Flash forward to Harkins guided Glidewell to think about and identify new growth opportunities for Pro Landscapes. One idea was landscaping new housing developments on military bases. Glidewell realized that he had several residential construction clients that were beginning to do a booming business on military bases. It was enough that we could realistically project 14 SMBFINANCE JULY 2006

17 CALLING ALL SMALL & MEDIUM BUSINESS BENEFITS AND HR PROFESSIONALS! September 17-19, 2006 The Hyatt Regency Chicago Hotel Chicago, IL REGISTER BEFORE AUGUST 4TH AND SAVE! TACKLE YOUR TOP CONCERNS AND BOOST YOUR BOTTOM LINES KEYNOTE PRESENTERS Michael La Bianca VP, Human Resources HOT TOPICS New Ways to Save on Pharmaceutical Benefits Mini-Medical: The New Low-Cost Group Health Plan Little Things That Mean a Lot to Your Employees Communication for a Multicultural Workforce Mini-Medical: The New Low-Cost Group Health Plan The Latest Strategies in FSA, HRA, and HSA Plans What your CFO Wants from You New Formulas for Calculating Benefits ROI Communicating to Employees Through Cell Phones Clearing the Legal Hurdles to Disease Management Using Incentives to Boost Health Plan Outcomes 2005 Fortune 500 list # Fortune magazine s 100 Best Companies to Work For list #5 (Companies with over 10,000 employees) KEYNOTE ADDRESS From Parent to Partner: The Changing Role of the Company and the Government in the Employee Benefits Equation How to make your employees become a partner in driving down benefit costs. A lawyer and accountant by training, Mike La Bianca will discuss the changing roles of employees, employers and government in this process. Mark Shields Syndicated Columnist and Political Analyst PBS s The NewsHour With Jim Lehrer Wittiest Political Journalist in America The Wall Street Journal Mark Shields will share first-hand accounts and impressions of the current state of Washington politics and will present them against the backdrop of political history. Washington is the seat of benefits compliance and regulation. How are changes there affected you and your company? S. Gary Snodgrass EVP and Chief Human Resources Officer Exelon Nation s largest utility company Fortune 500 list #145 KEYNOTE ADDRESS Critical Challenges Facing HR Today How do great organizations best leverage their human capital to win? How to foster positive employee relationships while moving from a state of entitlement to a state of earning?

18 enterprise. In Glidewell s case, projecting rapid growth from landscaping military bases no doubt got the attention and whetted the appetite of the entrepreneur who bought Pro Landscaping last year. It s a good selling tool, he says. But the price was totally driven by EBITDA [earnings before interest, taxes, depreciation and amortization]. Without the EBITDA, you re not going to get a buyer. OK, but what is true EBITDA? On this matter, financial executives can rely on basic number-crunching skills to help prospective buyers get an accurate (and, one hopes, attractive) picture of profitability. Jandali helps that process along by recasting financials. We calculate what we call seller-discretionary cash flow, basically the free cash flow that a company has. In addition to adding such expense items as interest, depreciation and other items used for a standard EBITDA calculation back to the bottom line figures reported on tax returns, Jandali also cranks back in discretionary business expenses. A company s tax returns are used as the starting point because, as Pat Harkins points out, skeptical buyers understand that nobody s ever reported more income on a tax return than they have earned. Discretionary expenses may be in the eye of the beholder, he notes. Sellers will try to add back in as much as possible to raise reported cash flow, and buyers (and bankers) will scruticoverfeature that the company would double in size over the next two or three years with that new operation, Glidewell says. Of course, a buyer needs some evidence that such a dream is more than, well, a dream. But because Glidewell wasn t hellbent on an immediate sale of Pro Landscapes, he had the time to land a few military base contracts to demonstrate that this was indeed a serious growth opportunity. If you want to get full value for cash flow from a new component of revenue, you need to do it for at least a year. One month is not real, says Enlign s Snell. DON T FOUL YOUR OWN NEST Just as buyers are looking for real growth opportunities, they also, of course, want to see real profitability. Thus the temptation arises when a sale is looming to hastily slash expenses. Doing so may seem like a quick-and-dirty recipe for higher operating income, but if pursued too crudely, it can backfire, brokers warn. For one thing, you could spoil all the fun for the new buyer. Lou Phelps, of Phelps, Cutler & Associates, in Savannah, Ga., who serves as a strategy and financial consultant to media companies, points out that buyers love to buy properties where they can say, Oh, gosh, we could cut this. We could cut that. We can make it much more profitable than [the current owners]. When you re already running a totally Cadillac, pencil-sharpened operation, and therefore you want top dollar, the buyer is going to ask himself, Where do I take it from here to recoup the top dollar that you re asking me to pay you? Phelps says. Phelps comments are echoed by Malek Jandali, CEO of VR Business Brokers in Atlanta. The issue isn t so much cutting costs, he says, as knowing how to run a company with the optimum level of resources something that a financial executive should be helping a company achieve with or without the prospect of a sale. Cutting costs doesn t mean firing people or having crappy technology, Jandali said. It means working more efficiently. It is achieved with the right management, the right goals and working as a team. It s not only about the figures. Most numbers come from behavior where people have a stake in profitability. In the end, the key to a successful sale will be the buyer s sober assessment of the basic profitability of the Jeff Snell, president of Raleigh, N.C.-based Enlign Business Brokers, is on a mission to shatter what he considers to be myths about selling a business. While several myths point to the need for a broker, their validity is not necessarily undermined by their self-serving nature. Following are highlights from five of Snell s Top 10 list, available in full on his web site, I know what my business is worth. Reality: Such gut feelings are often based on incomplete or outdated information, and don t take into account the myriad differences between businesses. A competitor will Top myths on selling a business want to buy my business. Reality: For non-public companies, what a competitor is buying is rarely what the seller thinks he is selling. He is generally looking for something specific, such as additional geographic coverage or a key employee. The more people that know that my business is for sale, the better. Reality: Selling a business is not like selling a product or service. You can only accommodate one buyer, and bidding wars more often result in both potential buyers walking. Throwing out an unrealistically high price and seeing what happens sometimes works. Reality: A too-high listing price with an unsubstantiated valuation will either invite an offer from an uneducated buyer (which will likely ultimately fall apart), or consume a lot of time and effort without eliciting a qualified offer. Now is (or is not) the time to sell my business. Reality: Timing is everything, but your business goals will dictate the right time to sell. The average time to properly value a business, market it, identify a qualified buyer and perform due diligence is longer than most business owners think. A business is worth the most when the owner is probably least likely to be considering selling. 16 SMBFINANCE JULY 2006

19 Glidewell was able to prove to buyers that a new line of business could double the size of his company because he had already landed a few contracts to demonstrate its potential. nize all add-backs, and possibly disregard them. You just have to ask yourself if the expense was really necessary for the business to generate revenue. For example, the cost of sending an executive to a conference at a luxury hotel in Hawaii, or a limo service for the CEO, are good add-back candidates, he suggests. PAY AND THE PECKING ORDER A bigger item, in the case of a company run by its principal owner, is chief executive compensation. If he s paying himself a $500,000 salary but a competent general manager could be recruited by the new owners for half that amount, there s a legitimate $250,000 add-back. Which brings up another key issue in facilitating the sale: management structure. Harkins points out that buyers will want assurances that the company s post-sale management team will have the depth, breadth and ability required to keep the company successful after the owner checks out or fulfills a post-sale employment contract. The seller should be prepared to produce an organizational chart, plus profiles of key managers, noting their tenure with the company and compensation history. In some situations, it will be hard to put a good face on the management bench-strength and finances of the company. Not everybody can point to the kind of stellar financials that Pro Landscapes was able to put out. What then? Jeff L. Peskind, managing director of the New York-based JLP Credit Opportunity Fund, specializes in evaluating companies whose financial performance is lackluster or worse. Peskind s advice? Investors know nobody s perfect. They know people make mistakes. The best thing to do is lay out your plan [for improving financial performance] as clearly as possible, to get people comfortable that, first, you have a plan, and second, that you are aware that you have problems. LET A LITTLE BIRD TELL THEM... With any luck, however, the CEO won t chose a period of acute financial distress to ask you to lead the cheerleading squad for the sale of the company. Not surprisingly, that role, according to business brokers, should be left to them, in bad times or good. In addition to all the expected (and often legitimate) whyyou-need-a-broker arguments access to buyers, market knowledge, negotiating skills, etc. is the suggestion that a broker can help you by running you down. Well, sort of. Owners often will brag about how phenomenal their company is, notes Phelps of Phelps Cutler. The ironic result is that they ll get a lower price, she maintains. The broker, away from the seller s management team, can say, Yes, sales have been good, but truthfully you could put in an even stronger team over time and really bump this thing up more. And let me show you how. Which suggests that when you are asked, in that solemn private meeting with the CEO, to help with the process of preparing the company for a sale, you place golden parachute contract for the CFO at the top of the list of ingredients required for a successful sale. SMB JULY 2006 SMBFINANCE 17

20 VoIP The Economics of VoIP GETTING CHEAP TELEPHONE SERVICE OVER THE INTERNET SOUNDS GREAT EXCEPT WHEN IT DOESN T. BY LISA SPINELLI T erry Rogers, CFO of Smith Newspapers in Fort Payne, Ala., heard Voice over Internet Protocol telephone services can save companies thousands of dollars. But after researching a switch from his company s traditional phone service to VoIP, he just could not find the savings. I ve done some looking at it, and we re getting such a cheap long-distance rate that it didn t pay to give it up, said Rogers, whose company pays $45 a month for their telephone service. There s really no need to upgrade the hardware and spend money on headsets to switch to VoIP. Many small and midsized businesses feel the same way about the cost-efficiency of switching to VoIP, according to a survey of 560 SMBs conducted by Boston-based technology concern Savatar. The study found that 85 percent of those polled did not see a value in switching over to a VoIP network. Statistics vary significantly on the penetration of VoIP in the SMB space. In one study performed last year, Phoenix-based InfoTech Research Group claimed that 23 percent of SMBs were using VoIP, and predicted that 50 percent of all SMBs will subscribe to a digital voice service by Research groups like the Boston-based Yankee Group, on the other hand, say that only 5 percent of SMBs today use Internet phone services, and the numbers are not likely to shoot up any time soon. INFORMATION, PLEASE Just as can be cheaper than a phone call, VoIP services can bring significant cost savings. Offices that have multiple branches or a number of remote workers who constantly call across different area codes may find thousands of dollars in savings when using VoIP. But these benefits won t necessarily materialize for all businesses. SMBs that do not make many long-distance calls between offices, or to clients, and yet try to use IP networks for all their calls, can find themselves with telephone calls of poor quality, slower Internet connectivity and minimal savings. I don t understand [major VoIP provider] Vonage s business model, to tell you the truth, said Gary Ritacco, president of Ecomm, a voice, video and data communications provider ILLUSTRATION RYAN ETTER 18 SMBFINANCE JULY 2006