IBBA Insights Spring 2023

The best insights on buying and selling small businesses

Defining Moments

Kyle Griffith, CBI, CM&AP

Joining the IBBA in 2016 was a defining moment in my business brokerage career. I wanted to broaden my knowledge of business sales, network and learn from industry leaders. My participation in the IBBA has been invaluable, and I was honored to be elected to the Board in 2019. With now over 13 years’ experience, I credit my success to the IBBA and aspire to continue seeing this organization keep creating defining moments in the lives of others.

I think, by definition, a defining moment often entails doing or achieving something that hasn’t been done before. With over 2,800 members the IBBA is the largest and strongest we’ve ever been and we’re attracting a more diverse pool of people to our profession and organization; it’s a defining moment. Passage of the Brokerage Simplification Act is a significant, defining moment for us all. If we look back just a few short years at the progress of our education programs, awards, benefits and Conferences, each has experienced a defining moment of new heights that has increased value for membership. The question then is, where do we go from here?

Just as with our own professional development, the IBBA must strive to achieve new defining moments. Here are a few on the radar that I’m most excited about…

DEFINING MOMENT: RAISING AWARENESS OF THE BUSINESS BROKERAGE PROFESSION.

As insights from our business owner research studies come in, we will be better equipped to play an even stronger role in making sure business owners understand that working with a Business Broker is essential. Increasing the knowledge and utilization of professional Business Brokers will be a defining moment that is central to our primary purpose.

DEFINING MOMENT: ATTRACTING THE NEXT GENERATION. Starting years ago we’ve been intentional about better educating people about the industry and in being an organization that supports the advancement of women in the profession. Just look around our Conferences or Zoom meetings and you can see change happening; we have more diversity than ever before, and this benefits us ALL. We’re continuing to press into these areas and explore new ways to help more people flourish. Breaking the mold of a ‘good ole boys’ profession and setting up the next generation for success is a defining moment to certainly be proud of.

DEFINING MOMENT: THE LARGEST BUSINESS BROKERAGE CONFERENCE IN HISTORY. It’s not an exaggeration to predict that this year’s Conference in Orlando will be the largest we’ve ever seen. As an attendee, that means you have even more insights and best practices to tap into – any one of which can result in a defining moment for your personal success. Many of my own significant moments can be correlated back to a course, conversation or connection that happened at an IBBA Conference.

The other thing you begin to realize about defining moments is that they do not come from working in isolation and their impact is not isolated either. By surrounding ourselves with like-minded individuals, investing in our skills and supporting each other collectively, we can positively impact the industry and achieve personal and professional growth. And as you then take your skills to the marketplace and help business owners transition, YOU are creating defining moments in the lives of so many others who are impacted by that business. I can tell you that seeing that happen is the most fulfilling aspect of what we do.

If you can’t tell, I love what we do as Business Brokers and I am so honored to serve as Chair of the IBBA this year. I want to express my gratitude to the previous Chair, Randy Bring, for his exceptional leadership and unwavering dedication to the organization. The IBBA made remarkable progress and achieved great success under his leadership, working in tandem with Board members, volunteers and staff. It’s the dedication of these people that has cemented IBBA as the world’s premier, professional association for Business Brokers, and it’s that continued dedication by the people of our organization that will drive us all to our next defining moments. I look forward to working with every one of you to continue the IBBA’s tradition of excellence and growth.

See you in Orlando!

Best regards,

KYLE GRIFFITH CBI, CM&AP Managing Partner The NYBB Group

The IBBA: 2,800+ Members Strong, and Growing!

Inaugural Master’s Education Program

Barry J. Berkowitz PhD, CBI, M&AMI

In recent past years, the IBBA heard from many of our tenured Certified Business Intermediaries® (CBI) who practice in the main street and general marketplace. They voiced their desire for advanced education to have even more expertise in what they do. It was the vision of IBBA Executive Director, Kylene Golubski, to develop a Master’s Education Program to satisfy those needs. Kylene said, ”One of IBBA’s principal focuses is to deliver education on the knowledge, skills, and techniques permitting Business Brokers to operate at the highest level of competency to best serve the needs of their clients.”

During 2022, the effort began to make the Master’s Education Program a reality. The Program is focused on the CBI member who wants to expand and extend his/her knowledge base within the main street and general marketplace. Some IBBA members want to move onto bigger deal sizes in the the lower middle market and learn how to do that by becoming members of the M&A Source®, IBBA’s sister organization. However, a significant number of tenured CBI’s are more interested in continuing to work in the main street and general marketplace to increase their depth and breadth of knowledge in that space. Unlike the entry and intermediate level education where the “nuts and bolts” of business brokerage are taught, this Master’s Program was designed to teach a higher level of knowledge and skill sets. Steven Beal, IBBA’s Education Committee Chair, comments that, “… education at the IBBA must be innovative and stay at the leading edge of content and technology. This Program certainly does that.”

The Master’s Education Program content was developed and is being delivered by some of IBBA’s best instructors. The Program focuses on the subtle, and often surprising, issues that occur in actual deals but can usually be avoided only through expertise and years of experience. Many times, these difficult issues can end a deal; an outcome we can perhaps avoid. It is the intent of this Program to focus on preparedness and the actions that the Business Broker can take to anticipate and prevent such issues from arising, and to know how to effectively handle them when they do arise.

Rather than a lecturing environment, our students are learning through a colloquium type setting that is more reminiscent of the learning process in graduate school studies. Thus, our instructors have been renamed as Professors for this Program. Each of the 10 Professors spends a month on a different aspect of the business brokerage process. They meet with the students live, online two times per month with pre-work, exercises and discussions with the students participating in the colloquium setting. Topics include issues and experiences, and are discussed by all sharing their ideas. It provides an opportunity for the CBI to learn of the mistakes and accomplishments of others, saving many years of building those experiences themselves. The ten Professors for this inaugural Program include Cress V. Diglio, Rich Mowrey, Louis Pereira. Glen Cooper, Jim Afinowich, Andy Cagnetta, Tawnya Gilreath, Lou Vescio, Monty Walker, and Pino Bacinello. The colloquium style of learning is delivered live, online using IBBA’s learning platform at www.ibbauniversity.com

The result is that the entire group gains the knowledge and virtual experiences of others. Cress Diglio, with many years of experience, tell us that he has learned many new ideas from the students. Lou Pereira, who is teaching the valuation session, spent zero time teaching the math; every student already knew the valuation process. Instead, Professor Pereira was more focused on the thought process involved in valuing a business. He posed interesting scenarios for the students to discuss and the results, coming from various experiences, were very helpful to all.

We have to date completed two months of the 10-month Program. The sessions were designed to follow the various stages of the business brokerage process. They include:

• Prospecting for Sellers

• Pre-Due Diligence with Sellers

• Analyzing and Valuing Businesses

• Packaging and Marketing Businesses

• Identifying and working with Qualified Buyers

• Negotiating the Deal

• Legal Issues

• Due Diligence

• Transaction Structuring, Closing and Transfer

• Ethical Issues

This Program has another pedagogical feature that is new to the IBBA. The students start together and finish together as a “cohort”. Our first cohort of students began in January and will complete the Program in 10 months, graduating together. We had such an overwhelming number of applications for the first cohort that we plan to start our second cohort during this year. Our expectation is that we will have multiple cohorts beginning in subsequent months during a calendar year.

Beyond the value provided by the education, successful completion of the Master’s Program will earn the individual the Master CBI® designation, signifying an advanced level of education and experience as a Business Broker. We look forward to bestowing this designation to our first graduating class in October.

I would like to provide thanks for the significant contributions of my co-chairs for this Program, Steven Beal - Chair of Education and Jim Parker - IBBA Board member. Significant credit also goes to the IBBA Education Staff for making this a successful new initiative of the IBBA and one that directly responds to our members’ demand for ongoing, higher level education.

BARRY J. BERKOWITZ PhD, CBI, M&AMI

Preparing for the First Buyer-Seller Meeting

Part Of The IBBA’s Best Practices Series

Randy J. Bring CBI, M&AMI, CM&AP

GREAT JOB! You’ve listed a profitable business; you’ve advertised the company and are now receiving some quality inquiries from potential Buyers. Successful Business Brokers understand the critical importance of the first meeting between a Buyer and a Seller and that one of the most important functions a listing Broker can perform is to properly prepare his or her Seller for this meeting.

With the assumption that the Buyer prospect has signed an NDA and has received a basic write-up on your listing, an appropriate next step will likely be a face to face Buyer-Seller meeting or, possibly an introductory conference call with the Buyer, Seller and the Broker(s) involved. Planning for this meeting with your Seller can assure a successful “first date” leading to sustained interest from the Buyer and deal progression. So how do you take control of this important step in the sale of the business?

Most first time business Sellers will be nervous, excited and stressed in thinking about and preparing for their first showing and I remind my Sellers that most serious Buyers will be feeling the same emotions. I then offer my guidance by taking control of the general structure of the meeting and suggest what should and should not be discussed in that meeting. In my practice, I generally advise:

1. The meeting should take place at the place of business before or after business hours and last from 60 to 90 minutes. If impractical to meet at the business, I select a neutral location such as a hotel lobby versus a noisy, busy and hard to find a seat coffee shop.

2. If your “Seller” is multiple partners or a husband and wife, I often advise-but never insist, that just one partner or spouse attend the initial meeting with the Buyer. Why? So often partners and spouses attending a Buyer meeting tend to “talk over” each other while competing for face time with the Buyer and in doing so, tend to correct each other or, worse, contradict one another.

3. I advise my Seller the meeting “belongs” to the Buyer. It is the Buyer’s opportunity to learn more about the business and the personality of the owner(s) while determining if there is a professional and personal connection between the Buyer and the company. While it’s appropriate to start the meeting with the Buyer offering some personal and professional background info on

himself and why he has some interest in the Seller’s business, this should be addressed only briefly and at the very start of the meeting. The meeting then belongs to the Buyer and it is the Buyer that should be leading the discussion.

4. A first showing is not a Buyer training session. Many Sellers tend to want to explain in detail the exact workings of every aspect of their business and sometimes, out of shear nervousness, over explain their business. After providing a brief history of the business, a Seller should be guided to start by explaining his business in broad generalities…. “This is what we do, this is what we make, this is the service we provide and here is the broad process by which we operate our business”. Over the course of the meeting, and, based on the Buyer’s focus, the Seller can then begin to drill down and address directed questions about specific areas of operation

i.e. employees, customers, equipment, marketing, etc. Let the Buyer control his own line of questioning, not the Seller.

Successful Business Brokers understand the critical importance of the first meeting between a Buyer and a Seller and that one of the most important functions a listing Broker can perform is to properly prepare his or her Seller for this meeting.

So often, what stops a Buyer from moving forward are not the specifics of the business itself but the credibility of the Seller and yes, the Seller’s Broker. Credibility is undermined when inconsistencies in the details of the business are recognized by the Buyer. It is imperative that the Broker and the Seller “get their story” straight and provide consistent and truthful responses when asked some of the most common Buyer questions which include:

1. Why is the Seller selling?

2. How many hours a week does the owner works?

3. When does the lease end and what options are available?

4. Why the decline in sales this year?

5. How long will the Seller train and transition the business after closing?

6. Do you have any customer concentration issues?

In preparing my Seller for a first Buyer meeting I council my client that no deal negotiations should take place during the meeting. In addition, I exert a certain level of control over the meeting by advising my Seller’s to:

1. Turnoff or silence his cell phones during the meeting.

2. Dress appropriately for the meeting.

3. Not to exchange contact information with the Buyer at the end of the meeting (all communications between the parties should be directed through the Broker(s). In the case of the Buyer being represented by his own Broker, I will politely refuse offering my business card to the Buyer while instead commenting that he can communicate with me through his agent.

4. To bring a sample product to the meeting or something tangible that the Buyer can touch or possibly take home. This could be a company brochure, a menu or even a small widget if the company makes or distributes a product. Ensuring a comfortable first meeting should involve some forethought and planning on the Brokers part

Experienced listing Brokers should:

1. Reconfirm the time and place of the meeting with all parties 24 hours in advance.

2. Show up at the meeting location at least 15 minutes early to know where the sit-down part of the meeting will take place and to ensure enough seating for all attending.

3. Have copies of the listing sheet or offering memorandum that was provided to the Buyer in advance of the meeting for himself and Buyer/Seller if needed.

I prepare all my Seller’s by telling them to expect to answer in a clear and concise manner the three most common questions all good Buyer prospects will likely ask during the first meeting:

1. What are the biggest challenges facing you as the owner of your business (the “what keeps you up at night” question)?

2. What is the upside in your business (the “if giving unlimited time and money, what direction would you take to grow your business” question)?

3. Why are you selling? (the “if things are so great in your business, why are you gettin out” question)?

Experienced Business Brokers understand the importance of the first Buyer-Seller meeting as just one of the many steps towards advancing a transaction to contract, due diligence and closing. The goal of the first meeting is to uncover the synergies between the Buyer and Seller and to demystify the operation of the business for the Buyer so he can better understand the operation and picture himself as the future owner of the company. The best Business Brokers I know learn how to control this important meeting by setting proper expectations and guidelines for all parties to follow while, most critically, not getting in the way of the direct communication between the Buyer and Seller. Your Seller has hired you to provide your advice and experience in deal making; Your ability to plan and prepare your Seller ahead of his first showing will ultimately determine how well this meeting will go and, possibly, whether your Buyer remains interested in moving forward.

RANDY J.

BRING CBI, M&AMI, CM&AP

When You Want to Work with the Best, Look for a CBI

A CBI has the ability to objectively guide clients through the intricacies of the entire marketing and negotiation process of a business sale, resulting in successful transactions and satisfied clients, while offering the most experienced professional representation available.

Thank You to Our IBBA Conference Sponsors!

BRONZE

PLATINUM SPONSOR | KICK OFF COCKTAIL PARTY EDUCATION

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Financing through the SBANavigating the Underwriting Process through a Seller’s Lens

Tim Kellander

KeyBank SBA Representative

For many brokers and sellers, the underwriting process is often one of the most mystifying and frustrating stages in selling their business. They’ve prepared the business for sale, vetted potential buyers, provided intimate financial details, and now suddenly find themselves lost in the proverbial black hole of SBA underwriting with what might feel like poor communication, little control and unclear timelines. While the financial institution is typically not chosen by the seller, it is possible for the seller and their broker representation to give their chosen buyer a “leg up” when working with a lender by taking some steps in the early stages of the deal. In some instances, the broker and/or seller may even assist in introducing their buyer to a lender who is either familiar with the business, or who they know has been successful with acquisition financing in the past.

How long does underwriting take?

While the timeline is often greater in M&A circles, if a complete financial package is provided at the time of submission, the SBA underwriting process typically only takes 7-10 business days.

As the underwriting process progresses, questions often will be asked of the buyer and/or seller about aspects of the financial results, the proposed structure of the deal, or other material considerations. It’s important to note that this 7–10-day clock can be paused while waiting on answers.

Providing incomplete answers or simply not responding in a timely manner can cause the underwriting process to drag on. At times, buyers may be fearful to go back to the seller to ask these questions, thinking that it might scare the seller or weaken their negotiating position, and thus attempt to provide answers on their own that may not suffice for underwriting. The seller and broker can often head off these types of issue by letting the buyer know that they welcome any questions from the lender and by just being generally approachable throughout the process.

Delays can also be caused if the financial package is incomplete. While most sellers understand that year end financials, tax returns and other reports will be necessary, they don’t always fully understand what will be required of them for their buyer to gain SBA approval of the loan. Three important pieces of information that will typically be required are Interim Financials, an Addback Schedule, and an explanation of any one-time expenses:

Interim Financials

The seller should be preparing an income statement and balance sheet on a monthly or quarterly basis. The lender will expect interim financials that are within 90-120 days of the date of underwriting. These should include a prior year comparison showing the matching time frame. If the seller is unable to produce everything that is mentioned here, it’s important to discuss that up front with the buyer and their lender to determine what accommodations (if any) can be made.

Addback Schedule

Any expenses that will be eliminated as a result of the acquisition should be detailed in an addback schedule. Accurate and specific amounts should be provided for each financial period and tie back to the tax return or interim financials submitted to the lender. Additional supporting documentation might be requested such as W2s, Invoices for benefits costs, etc to verify the amounts. Addbacks such as seller’s wages and benefits, salaries of key personnel exiting the business, and eliminated rent are typically easy to justify. Expenses that are more personal in nature may not be allowable under SBA underwriting guidelines.

One-Time Expenses

It’s very important to make sure that the buyer is prepared to address any one-time expenses in the financials. The seller should not attempt to hide or gloss over these items, but rather explain and mitigate them. Perhaps there was a large one-time inventory write-down due to a lost customer, or repairs & maintenance costs were abnormally high in one year due to an act of nature – these items are explainable and it’s always better to call them out as early in the process as possible.

The best

advice

to

navigate the underwriting process with speed and efficiency is to remember that “The most complete package wins.” If the seller provides all necessary information up front, delays will be avoided during the underwriting process.

What can I do to help qualify my buyer?

As a broker or seller, qualifying the buyer can often pose a challenge. The buyer is hesitant to share too much about their financial position for fear that it may weaken their negotiating position. Selecting the wrong buyer can set the process back significantly, so finding ways to prequalify potential buyers is an excellent strategy to avoid this pitfall. The primary areas that a seller may wish to examine would be source of equity injection and relevant business experience:

Source of Equity Injection

While the buyer may not wish to provide a full personal financial statement or copies of their bank statements, it is critical that they have sufficient liquid assets to meet their equity injection. Most SBA loan structures require a minimum of 10% equity. A well-qualified buyer will typically have liquid assets (personal cash, business cash, stocks) of 15-25% of the purchase price. The method for assessing a buyer’s financial strength may vary depending on the size of the transaction and the seller’s relationship with the buyer, but without a source of equity, the loan request will ultimately be declined.

Relevant Business Experience

SBA Borrower’s do not need to be a prior business owner, in fact many are first-time business owners. However, any potential business owner must possess the relevant experience necessary to qualify to purchase the business. This may include currently possessing a management role in a similar company or past experience in a related field. The industry and complexity of the business will greatly affect the level of experience desired. Some businesses may require specialized knowledge and experience, examples include a law firm, manufacturer, or contractor. Having potential buyers provide a resume that highlights their experience relevant to the target business and industry might be helpful in selecting the most qualified prospective individual or ownership group.

Should the seller discover that a potential buyer perhaps doesn’t quite meet the qualifications described above, providing a level of seller financing into the transaction may help mitigate that weakness. When a lender sees that the seller is willing to defer a portion of their sale proceeds over the life of the loan, that demonstrates a belief the seller has in their buyer to successfully

navigate the transition and pay them back over time. Seller notes can be structured in a variety of ways, and it is recommended to discuss any potential structure with both the buyer and their lender before making any firm arrangements.

The Bottom Line…

For many brokers and sellers, the underwriting process feels like a stage that is out of their control. With proper preparation on the front end and a strong relationship with the potential buyer, the seller can have greater involvement during this critical portion of the acquisition process. Introducing a potential buyer to a lender with experience in business acquisition financing can also be a great way to help expedite the underwriting process.

KeyBank believes small business loans are at the heart of a growing economy. KeyBank is a Top SBA 7(a) Lender in the Nation* and also has been designated as a Preferred Lender for more than 20 years**. The Small Business Administration (SBA) loan programs available through KeyBank offer terms not always available with other loan types including longer terms and lower monthly payments.

TIM KELLANDER

KeyBank SBA Representative

Legislative Update:

The M&A Broker Registration Exemption is a Game Changer!!

J. MICHAEL ERTEL Co-Chair BIEF Campaign for Clarity mertel@transworldma.com

JOHN ZAYAC IBG Business Managing Partner, Founder and Principal infojz@IBGBusiness.com

The recent passage of the M&A Broker Exemption (HR 2617) amends the 1934 Securities and Exchange act. This modification is an industry changing event. The support from the IBBA, M&A Source, AMAA, BIEF, and 100s of other firms and individuals have made this change in history possible!

Now brokers can structure and sell transactions in dozens of different ways to help clients maximize value. Armed with knowledge of the tools and rules of this historic change will differentiate professionals and allow brokers to compete with Investment Bankers and enter into transactions they would have been forced to avoid in the past. Brokers can use this recent event as a new opportunity to provide a higher level of services and be compensated in securities transactions.

The registration exemption has numerous rules to navigate that our associations are ramping up to provide the courses, podcast, and knowledge for the broker to successfully traverse. This is an opportunity for you to provide a higher level of service and increase your compensation. The following are only a few services Brokers can, if within the guidelines of the exemption, now provide:

• Structure securities transactions to minimize taxes.

• Promote the sale of 25% or more of a business.

• Create, be compensated, and participate in rollover equity

• commonly used by PEGs.

• Expedite complex transactions with numerous customers or vendor bases.

• ncrease tax efficiency between parties.

• Utilize shares of stock/membership interest as equity, or incentives in transactions.

• Any many more tools and structures that benefit all parties in a transaction….

Be the expert in your industry and educate Attorneys, financial planners, and accounting firms to these structures you can now provide and increase your income and the size of transaction you focus on.

Federal Law has been changed. Twenty (20) states have passed similar changes. Yes, we have another 30 states to align with the Federal Law, but commonsense legislation changes in states is much easier than changing the federal law.

BIEF, with your association and individual support, is working with Shane Hansen of Warner Norcross & Judd to provide the tools to navigate the change in your individual state including:

Whom to contact see here: Proposed standard language for the state to use that aligns with NASA (National Associations of Security Administrators) and federal law. Q &A list of common questions and the benefits of this change Slide deck to more efficiently communicate this commonsense approach and the numerous benefits to their constituents, small business owners and why 20 other states support this exemption.

Remember, there several details in the exemption you need to be knowledgeable of to implement within the guidelines. See here for more details.

BIEF’s mission is to support our industry. Created by the officers, directors, and distinguished leaders of the IBBA in 2003 to provide services beyond their charter to advance and promote the profession. BEIF worked across the industry with all associations, advisors, bankers, and brokers to support this historic change in our industry. BIEF has more to accomplish to support this fine industry and need your financial support here to continue to navigate the state and future projects. Support the industry and the M&A Broker Registration Exemption that we were told would never happen, contribute now to Business Intermediary Education Foundation | BIEF (biefoundation.org) and be a part of history.

J. MICHAEL ERTEL JOHN ZAYAC Co-Chair BIEF Campaign for Clarity IBG Business Managing Partner, Founder and Principal mertel@transworldma.com infojz@IBGBusiness.com

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