How Do I Value My Company?

There are two main ways for business owners to value their company. One is through a business valuation and the other is through a calculation engagement. In a business valuation engagement, the answer is expressed as a conclusion of value. While in a calculation engagement, the answer is expressed as calculated value. For this blog we will focus on the calculation engagement.

This service does not provide a full conclusion of value, but rather a reduced calculation of the value of a company. In addition, the calculation engagement does not provide the same level of assurance as a valuation. However, it is a viable and less costly option. However, there are certainly situations where a calculation engagement is beneficial and we will list those below.

As stated in the NACVA Professional Standards, “A Calculation Engagement occurs when the client and member agree to specific valuation approaches, methods, and the extent of selected procedures and results in a Calculated Value.” The resulting calculated value should not be used for any other purpose or by any other party for any purpose.

Situations Where a Calculation Engagement Is Beneficial
  • Buying out an internal partner
  • Buy or sell insurance needs
  • To fulfill bank needs
  • To get a rough estimate of the fair market value of your company, should you be in the process of deciding to sell
What Is Delivered

This service provides the client with a 15-30 page report on the things that are driving the value of the company. It can be used as a strategic way to look at your value today and make changes over a period of time in order to drive the value higher.

How you value your company is up to you. We recommend considering a Calculation Engagement by a Certified Valuation Analyst (CVA).  Contact the CVA professionals at LBA Haynes Strand for your no-cost consultation!

5 Tips to Buy Out a Business Partner

Buying out a business partner can be an intimidating venture, sometimes a messy one. However, when both parties are aware of the situation, and both parties mutually understand the process as well as the value of the company – it can be much easier.

We have identified 5 tips to make the buying out a business partner a smooth process for both parties. 

Tip 1: Make Sure To Get A Buy/Sell Agreement In Place

Make sure up front when the company is started or as soon as you read this to get a buy/sell agreement in place.  This is a legally binding document between the owners of the company.  This document agrees to certain parameters if something should happen to one of the owners, such as: death, disability, divorce, or that they simply disagree and want to leave the company.  If you have one of these agreements already – consider yourself lucky!  Without a buy-sell agreement the rest of these tips and process might be more challenging.

Tip 2: Be Rational And Realistic

Whether you are the buyer or the seller, this may feel like your “Baby” that you are selling to your other partner…..but it’s NOT.  Treat it as you would any other business transaction, keep emotions out of it, or you may find yourself in a dead end where no one can agree.  If each person has 10 things they want out of the buy out, getting 6 to 8 of those things may be realistic – but certainly not all 10.

Tip 3: Get A Valuation Of The Company

Do not simply agree on a price as the buyer or the seller.  This may lead to hard feelings in the future if the company grows exponentially or if the company fails.  Either way the buyer or seller may feel they got the short end of the stick.  A valuation will help you agree that someone independent of the company and properly licensed has provided you a fair market value of the company.

Tip 4: Get An Attorney To Draft The Buyout

You want to get an attorney that is familiar with mergers and acquisitions to draft the buyout.  Even if the parties agree on all terms, getting it properly and legally documented is critical to the process.

Tip 5: Funding Is Available

There is funding available, it doesn’t have to be out of current cash or future cash flow.  The SBA has products available that are fixed term 7-10 year notes at competitive interest rates that allow one partner out in the small business space.  This allows the owners to part ways completely and not have to stay in each other’s business because they owe each other money.  It provides a cleaner break between the two parties.

LBA Haynes Strand has the experience to provide you the fair market value of your company. Our team of Certified Valuation Analysts (CVA), are well versed in buyout situations and can help both parties seek the proper resolution they deserve. To receive a proposal for the valuation of your business – CLICK HERE – and our team will reach out within 24 hours!

Property Management Companies Are Growing Through M&A

Mergers and Acquisitions have become an increasingly popular growth strategy among property management companies. In an earlier blog titled, “What Industries Are Growing Through M&A,” we mentioned property management companies as a top industry for mergers and acquisitions. So let’s dig a little deeper and learn what is being gained by M&A and what trends are driving M&A in the property management marketplace.

What Property Management Companies Are Trying To Gain Through M&A:
  • Size/Proximity to New Locations: In some cases, especially in the Charlotte area, management companies are looking to grow across State lines.  Rather than a Charlotte based management company opening a new location in South Carolina, they will often acquire other established management companies already based in South Carolina.  This is also true within the State as well (Charlotte -> Greensboro, Wilmington, Raleigh, etc.)
  • Economies of Scale: Management companies deal with many different service providers from landscapers and painters, to accountants and attorneys.  As management companies grow and manage additional communities through M&A, they are better able to pass cost savings (via economies of scale) onto their clients.  Doing so, theoretically, makes the management company more attractive in the market place as they are better able to offer attractive rates.
  • Additional Management Offerings: There are many local management companies who specialize in residential communities while others mainly do commercial associations.  Through M&A, management companies may be able to acquire residential work if they didn;t already have it, or vice versa.
What Trends Are Driving M&A In The Industry:
  • Real Estate Brokers Wanting Out: Community management is NOT a glamorous field. In lean times (2008 – 2012) many small/local real estate sales offices turned to property management when they were struggling to sell homes. With real estate “Hot” again, some real estate agents are looking to shed their portfolio of community associations to better focus their efforts on more lucrative selling activities.
  • Lack of Succession Planning: Similar to the CPA industry, some “mom and pop” community management companies simply have no succession plan, while other “younger” management companies are seeing this as a great opportunity for M&A.
  • National Players Coming To Charlotte: Up until 2008, community management in Charlotte was pretty much locally run (i.e. 20 or so management companies throughout the State and SC, perhaps). However, in the past 5 to 7 years, Charlotte has experienced an increase in nationally known management companies who often launch their local office by purchasing a locally-owned community management company.

This may be un-chartered territory for some management companies, and LBA Haynes Strand is here to help. We have a team that understands the needs and the financial issues associated with HOAs and property management companies. If your property management company is looking to grow through M&A, schedule a no-cost consultation with us and we will walk you through the steps for a successful merger or acquisition.

What Industries Are Growing Through M&A?

In recent years, mergers and acquisitions have seen a rise in popularity as a way to grow a business. Why is this? Much of this can be attributed to the aging of the Baby Boomer generation. Baby Boomer business owners are looking to retire or to cash in on the businesses that they have built. They are looking for opportunities to sell and the marketplace is very aware of this. As Generation X and Y continue to develop and build on their entrepreneurial backgrounds, there are many opportunities to buy businesses and grow businesses exponentially through M&A.

Mergers and acquisitions are not prevalent in every industry. However, there are some industries that are considered very active. These are the industries focused on growth through M&A:

  1. IT/Technology Companies
  2. Construction Companies
  3. Property Management Companies
  4. CPA Firms
IT/ Technology
Why M&A?

Technology companies want to gain access to intellectual property and talent, enhance new product lines (through acquisitions), acquire innovative product lines/technologies, and finally technology companies want to enter new markets. In addition, technology companies realize that these achieving these objectives through in-house operations would be very expensive and time-consuming. M&A gives these companies instant solutions and results.

Trends Driving M&A In The Technology Industry:
  • Cloud Computing
  • Mobile Technology
  • Data Analytics
Construction Companies
Why M&A?

Construction companies want to gain access to an expanded geographical footprint with new markets, a larger workforce, increased financial flexibility, and additional service offerings. Acquisitions have been increasingly popular among construction companies as larger companies are looking to add a specialty service offering. For example, lets say you hire a contractor to come in and install new siding on your house. They do a great job and you are pleased with your decision to use their services. If you find out they just added custom garage door installation to their list of services, you will probably use them again. The increase in service offerings through mergers and acquisitions gives construction companies the ability to sell multiple times to the same client which increases revenue.

Trends Driving M&A In The Construction Industry:
  • Favorable capital market conditions
  • The shale revolution
  • Labor shortages
  • Aging and retiring population of owners
Property Management Companies
Why M&A?

Property Management Companies are using M&A in order to gain: size, proximity to new locations, economies of scale, and additional management offerings. In some cases, especially the Charlotte area, management companies are looking to grow across state lines. Rather than a Charlotte management company opening a new location in South Carolina, they will often times acquire an established management company in South Carolina. This can be seen in the state of North Carolina, when management companies based in Charlotte use this tactic to gain access into new cities, such as Raleigh, Greensboro, etc.

Trends Driving M&A In The Property Management Industry:
  • Real Estate brokers wanting out
  • Lack of succession planning
  • Competition: National players coming to Charlotte
CPA Firms
Why M&A?

Growth through M&A has steadily increased for CPA firms. Firms want to gain access to talent, new marketplaces, and new service offerings. A CPA Firm may lack the time and the talent to grow a certain niche or service offering that they see an opportunity in. The best way to achieve instant entry into the marketplace is often times through a merger or an acquisition of a smaller firm that specializes in that service/nice and has the talent in place to achieve results. These can lead to an INSTANT increase in revenue and a larger footprint.

Trends Driving M&A In The CPA Industry:
  • Aging and retiring population of owners
  • New service offerings
  • Lack or decrease of talent
  • Increase in competition

Growth through M&A is our specialty. If you are in one of these four industries and are interested in exploring how M&A can grow your business, contact us for a no-cost consultation.

10 Common Internal Control Deficiencies Found in Small Businesses

The following 10 common internal control deficiencies found in small businesses can cause the loss or damage of assets, loss of resources, and a decline in revenue. These deficiencies can easily be rectified by slightly changing or modifying existing processes or introducing basic internal controls:

1. Inadequate documentation / records
Documentation provides evidence of the underlying transactions. It is the input to establishing proper financial records. Financial documents should be pre-numbered to ensure all transactions are recorded and accounted for. This will help to prevent recording of the same transaction twice, as there should not be any duplicate numbers in your system. With proper numbering of documentation, tracing documents that relate to follow up queries/claims and questions from customers or owners of prior transactions will be easy.Proper documentation would most probably provide satisfactory answers to most, if not all, financial transaction related questions. Furthermore, adequate documentation will ease the process of compiling financial records and completing tax returns.

2. Key business cycles not properly defined 
Managers and owners don’t see the need to create written policies and procedures or just even basic flowcharts defining the key business processes, as some small business processes appear to be uncomplicated. However, this is probably one of the most unused control tools where the most value can be added with little effort. An effective procedure can align business objectives and help establish best practice operating procedures. As businesses have different focus areas, different cycles will be important to your business but for most businesses the following processes will be critical. Sales and Accounts Receivable, Cash Management, Banking Procedures, Purchases, and Accounts Payable. For a business selling goods, inventory controls will be an important cycle. Documenting key controls in each of these cycles will provide transparency and consistency. Specific roles and responsibilities in each of these cycles can easily be assigned to specific individuals. When improvements and changes are made to your processes, employees can quickly be informed, trained, and brought up to speed.

3. Lack of control with authorization of transactions 
Authorization of purchases should occur before the commitment of resources. Depending on the size of the business, levels of authority can be introduced to better eliminate the risk of inappropriate spending. For example, with orders above a certain dollar value, say $1,000, more than one quotation should be obtained which could ultimately reduce your overall expenditure. Authorizing of transactions before placing orders provides the owners/managers the opportunity to evaluate different purchasing options, and make sure items or services obtained will support the business objectives.

4. No oversight and review  
Small business owners many times get so involved in the day to day operations of the business that they tend to neglect performing basic review procedures. Business owners should take some time and interest in the financial records. This is an important aspect of fraud prevention. Not a lot of time is required to review monthly revenues, expenditure reports, inventory reports, budget vs. actual amounts, and variance reports. Having a more hands on approach will give the owner invaluable feedback on how the business is performing and where any potential problem areas or poor performance areas may exist. Review of the financial records is a critical component and input for better decision making. The frequency of the review of financial data depends on the volume of transactions and type of business, however, the review of financial data should generally be conducted on a monthly basis.  

5. Dated or ineffective information systems  
Small businesses run on lean resources and very little time is often spent evaluating information systems. Investing time in this area could add a lot of efficiencies in the long run.  List the systems in your business and the key performance measures you need from each. Working systematically though these will help you stay competitive and efficient. Many user-friendly software systems are out there which could shorten processing and operating cycles – and are not that expensive to operate. 

6. Lack of physical & logical security  
Lack of physical security of business assets and resources could result in the loss or damage to assets and resources. Access to equipment, petty cash, and check stock should be restricted to appropriate individuals and stored or locked in an appropriate secure location. Computer equipment and networks should be password protected and computer passwords should be changed regularly. Having firewalls and protective devices or software on computer systems is an important component to help prevent security breaches.  Protection of personal information and banking information are becoming increasingly important with the increase in risk of identity/credit card theft. Personal and employee data should be encrypted and stored in secure folders.

7. No formal ethical policies and procedures 
This control may not seem to be crucial for the success of a business, but without clear guidelines on the use of the business assets and expectations, in terms of integrity and ethics from employees, businesses can expose themselves to inefficiencies and misappropriation of assets.  A code of ethics is an open disclosure of the way an organization operates.  A well written and thoughtful ethics policy can serve as a communication vehicle that reflects important values and goals of the business.  It can provide guidelines of how employees should deal with potential misbehavior and/or misappropriation of assets and can provide alignment with regard to company values and commitments.

8. Job roles and responsibilities not clearly defined 
Employees are your most important assets and as a small business you are very reliant on your employees.  They are representatives with customers, suppliers, and competitors. For this valuable resource to be effective in your business you will need to provide clear direction and define appropriate roles and responsibilities for each employee.  Job roles and responsibilities should be clear and preferably be in writing.  This will ease the process of separating duties discussed in the next section.  New employees will quickly be able to reference back to their responsibilities and understand their roles better.   

9. Lack of separation of duties 
Small businesses are susceptible to fraud by their own employees as they may have a few employees with multiple roles. Each employee should have specific job responsibilities, preferably in writing to ensure there is no confusion in assigned job roles and responsibilities.  Generally, assigning different people the responsibilities of authorizing transactions, recording transactions, and maintaining custody of related assets such as cash and credit cards provides for more effective internal control and less opportunities for misappropriation of assets. 

10. Inadequate disaster recovery, backups and business continuity plans   
The importance of backups and business continuity are many times under-emphasized.  Systems can be designed so that back-ups are performed automatically and on a regular basis.  Backups should be made based on transaction volume and stored off-site.  To re-create data can be painful, time consuming, or not practical at all.  Business Continuity plans outline how recovery will be accomplished in case of a disaster.  Long term power outages or disruptions, offices not available for long periods of time, and loss of staff on a large scale are not that uncommon and can happen. Planning ahead for disasters before they strike is important to the survival of your business.  A disaster recovery plan typically consists of an emergency plan, disaster recovery plan, and a continuity plan.  

Changing your approach towards internal controls in your business in these 10 key areas, can make your business grow! Implementing control tools in these areas can be accomplished in a fairly easy manner and in a short amount of time. Consult your local accountant or auditor for advice with some of the technical financial processes and controls. Changing your focus in these 10 areas, will add a lot of value to your business over the long run!