In this issue:
– Commentary – When is an Expiring Tax Cut a Tax Increase?
– Why Some Businesses Don’t Sell
– Recent Transactions
– Extension of SBA Lending Incentives Mired in Congress
– Some Businesses We Are Looking For
– About The Principium Group
Commentary – When is an expiring tax cut a tax increase?
Until recently, it has seemed a forgone conclusion that the Bush-era tax cuts, set to expire at December 31, 2009, would in fact expire. Of course, those “tax cuts” included the reduction in the capital gains rate from 20% to 15%. This is a complicated political issue indeed, especially since letting those tax cuts expire was a specific campaign commitment of President Obama. Bush tax cuts became something of a dirty word during the past campaign. Political realities have set in. People have begun to recognize that “letting tax cuts expire” means the same thing as “a tax increase.” Economists and others have questioned whether now, with a clearly weak recovery in progress, is a logical time to have a tax increase at all. In addition, Democratic control of both the U.S. House and Senate is far weaker than most observers had
expected. As a result, it looks like debate on at least a temporary extension of the tax cuts may begin before the midterm elections. A number of Democratic leaders are arguing for at least a partial extension. It is impossible to predict the likely outcome of this process. This leaves
business owners that were contemplating making decisions based on the timing of the capital gains tax increase (oh, I mean the expiration of the Bush capital gains tax cut) in a tough place. That being said, given the ballooning federal deficit, it seems unlikely that tax increases won’t be on the horizon, even if an extension is passed this year, so a decision made based on the expectation of tax increases is probably safe, but they may or may not come at the beginning of 2011.
As always, if you are contemplating the sale of your business, now or in the future, please feel free to give us a call or email. Likewise, if you are considering an acquisition, we’d be happy to discuss your situation.
Why Some Businesses Don’t Sell
A good friend of mine is fond of saying that there is a buyer out there somewhere for any business – you just have to find them. While there is a degree of truth to that statement, it doesn’t tell the whole story. It is estimated that less than 20% of businesses that are listed for sale actually sell. Over the past couple of years, many businesses have not sold and many would blame a combination of general economic conditions and a lack of financing. There is a lot of truth to that explanation. However, many businesses actually have sold during that period. Many others haven’t. This article explores some of the reasons that businesses don’t sell. A lack of information about the business is often a major issue keeping a business from being sold. Financial statements and tax returns may be incomplete, erroneous or late. Many businesses prepare financial statements primarily in connection with filing tax returns that may be extended to nearly nine months after the end of the year. If a buyer is considering an acquisition, they will almost always lose interest if financial information is not forthcoming in a timely manner. If the financial statements do not break out the elements of the business in a way that is understandable to the buyer
and there questions cannot be addressed, it is likely they will either pass on the business completely or make a low-ball offer. For example, I have had clients in the green industry that had design/build revenues, maintenance revenues and garden center sales all on one line in their financial statements. They could describe how much of the business was represented by these sources, but they couldn’t back it up with records. It is also common for business sellers to begin to talk about their “cash” business in the belief that they can enhance the value of their business. I once even heard a business owner tell a potential buyer that he could prove his cash business by literally “showing him the money.” Not only will a business buyer discount such assertions, they are likely to be completely turned off.Cash flow is the driving force behind business acquisitions. Potential buyers evaluate an acquisition on the basis of the cash flows they can generate from the business. If a business does not demonstrate adequate cash flow, it is unlikely to be sold as an ongoing business. It may, in some cases, be able to sell a business on potential, but this is difficult and often results in low prices, partly because such acquisitions cannot be financed. Otherwise, the
business can only be valued based on its hard assets.
Buyers will also be concerned with the quality of the revenues and cash flows being generated by the business. How dependable are those revenues? How likely are customers to remain after an acquisition? Is revenue recurring or will the buyer have to resell customers? Do most of the seller’s revenues come from only a handful of customers? If a business is overpriced, it may not sell at any price. Buyers will be reluctant to enter into discussions with a seller who is asking a much higher price than the buyer would be willing to pay in the belief he may be wasting his time or insulting the seller. They will usually just move on to another opportunity. It is natural for a business owner to want to get the best possible price for his business.
It is best to get an expert opinion from someone who will tell you the truth – not just what you want to hear. In the green industry, many business owners hear stories of the multiple of revenues that businesses sell for. They believe that if a competitor got 85% of revenue as a sale price, then surely they should get at least that much. The real basis of pricing is usually the cash flow of the business, or at least the cash flow that the buyer will be able to generate from the business. You can only really compare pricing based on revenue if the margins or potential margins of the business are similar. Some businesses will not sell because the seller is not motivated or flexible in dealing with a potential buyer. They may want to sell, but only if they are able to receive their own unrealistic perception of the value of the business. They may be unwilling to consider such features as offering some seller financing. All other things being equal, a buyer will be attracted to a motivated seller.
Location is also a factor in whether many businesses will sell. Many businesses are not easily relocatable without an impact on the customer base. If a location is undesirable or there is no certainty that the location can be retained because the lease is short or may not be assumable, the business may not sell.
Poorly selected advisors are another reason that businesses don’t sell. To make a sale more likely, sellers should look for advisors, including attorneys, accountants, brokers and others, that are deal makers, not deal breakers. Deal breakers may try to renegotiate aspects of a potential transaction that the seller has already agreed to. This creates discomfort with a buyer – do they have a deal or not? It slows down the deal and runs up everyone’s fees. This usually happens with the best of intentions, protecting the interests of their clients, but often has exactly the opposite impact, making a deal that was within reach impossible to complete.
Poor market exposure is another common reason businesses don’t sell. Any business broker can post an internet listing for a business listing, but what else do they do? Can they identify, target and contact buyers who would be interested in the particular business being sold or do they just list it and wait for something to happen? Many businesses do not sell because the people who would be interested never hear about it. This is an extremely complicated topic because of the confidentiality concerns that most business sellers have, but it is crucial, because the more qualified buyers who know about the opportunity, the more likely the business is to sell and at a good price. Sometimes, businesses do not sell because there just really isn’t anything there to sell. That can happen when a business owner waits too long to make a move. It can also happen when the business may be totally dependent on the identity and personal services of the owner. On the other hand, it can also
happen when the business is totally dependent on employees who are really not tied to the business.
There is no silver bullet, but it is worth asking what factors make it more likely a business will sell?
* A sustained track record of quality revenues, profitability and cash flows.
* Good quality, timely financial and other records.
* A good location, well-maintained.
* High quality customer relationships tied to the ongoing business, not just
* Informed, reasonable, motivated, and flexible sellers.
* Professional advisors who know how to make deals work.
As of Mid-Year, the Overall Pace of Activity is Well Ahead of Last Year
A review of the Form 10-Q recently filed by The ServiceMaster Company, parent
company of TruGreen Lawncare, TruGreen Landcare and Terminix, among other
operations, reveals that the Company used $14.8 million in cash for payments
related to acquisitions in the first six months of 2010, roughly doubly the
$7.3 million used in the same period in 2009. About 60% of the acquisitions
were for the Terminix pest control division, with most of the balance for
TruGreen Lawncare. However, after the end of the quarter, Terminix acquired
Antimite Termite and Pest Control with an estimated $40.5 million in annual
revenues, the 20th largest pest control company in the United States according
to Pest Control Technology magazine’s Top 100 ranking based on 2009 revenues.
ServiceMaster indicated that it intends to continue its acquisition program in
its TruGreen Lawncare and Terminix subsidiaries.
The Form 10-Q filed by the Scotts Miracle-Gro Company, formerly an active
acquirer of lawn care companies, completed no acquisitions at all during the
nine months ended June 30, 2010. The Company had indicated in its Form 10-K
for the year ended Sptember 30, 2009, that it intended to continue to make
selectve acquisitions in fiscal 2010 and beyond. Atlanta-based Arrow
Exterminators announced the acquisition of Top Notch Pest Control of Tampa.
Top Notch is a full service company, specializing in residential and commercial
pest control, termite control, and lawn and ornamental services.
Extension of SBA Lending Incentives Mired in Congress
An extension of the highly popularSmall Business Administration lending
incentives first enacted as part of the Recovery Act in 2009 has been delayed
again. The incentives include two main parts. The incentives increased the
portion of an SBA loan that is government guaranteed from 75% to 90%, thereby
decreasing the risk to the lending institution that actually makes the loan.
The SBA is a guarantor, not an actual lender. The loans are made banks and
other lending institutions that choose to participate in the program. In
addition, the incentives waived most guaranty fees that are charged to
The incentives expired this time on June 1. When Congress failed to approve an
extension prior to the summer recess, September became the earliest they could
The incentives themselves are rather popular and do not have a great deal of
opposition, despite their cost to the Treasury in a time of growing deficits.
The problem is that they were included in the same bill that would enact the
President’s proposed $30 billion small business lending fund, which many
consider to be another banking bailout and of more dubious value to the small
business community it is ostensibly supposed to benefit.
With the bill bogged down in politics as the midterm elections loom, it is hard
to predict to the ultimate outcome.
Some Businesses We Are Looking For
This is a list of some of the businesses that we and our clients are presently
looking for. If this triggers an interest or you know of a business to refer
us to, please call us or send us an email.
Commercial landscape maintenance business– New England, Mid-Atlantic, Mid-West,
Chicago, Houston, Dallas-Fort Worth, Memphis, Nashville, Atlanta
Residential and commercial landscape maintenance – Houston, Naples, Florida
Lawncare – New England, Chicago, Cleveland, Columbus, Dallas-Fort Worth,
Mid-Atlantic, Rocky Mountains, Nashville, Memphis, Southeast, Texas and major
cities throughout the United States
Garden Centers – Cincinnati, Dayton
About The Principium Group
The Principium Group provides mergers & acquisitions and business brokerage
services to a variety of middle market and small businesses, with a focus on
the green industry. Put more simply: We help people buy and sell green
Our professionals have assisted buyers and sellers in hundreds of transactions.
For buyers, Principium provides assistance and counsel in strategic planning,
identifying potential acquisition targets, due diligence and planning for
successful integration of acquisitions.
For sellers, Principium provides assistance and counsel in evaluating strategic
alternatives, identifying and negotiating with potential acquirers and
assisting with transactions from due diligence through the closing process.
We understand that the decision to buy or sell your business is a profound one,
and we pledge to work with you in a professional and confidential manner while
we help you navigate this often confusing process.
Whether you have immediate plans to buy or sell a business or may sometime in
the future, we would welcome the opportunity to talk with you about your
Leaders in Green Industry Mergers & Acquisitions
Ron Edmonds [email protected]
Richard Helling [email protected]
Chris Martin [email protected]
If you are thinking about buying or selling a green industry business, we can
The Principium Group, Inc.
P.O. Box 414
Cordova, TN 38088
The information included in this newsletter is derived from publicly available
sources. Our intent is to give a perspective on the industry taken as a
whole. The inclusion of a transaction in this newsletter does not imply that
The Principium Group acted as an advisor to either of the parties to the
transaction. It is the policy of The Principium Group always to maintain the
confidentiality of its client relationships. For those transactions in which
The Principium Group did play a role, the information included herein is still
limited to that available through public sources.