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Shopping for a business / Market is ripe for companies ready to sell

April 3, 2000

Monday, April 3, 2000

Times-Dispatch Staff Writer

Some friends say he hit the jackpot.

David R. Bogese knows better. “I worked hard for 15 years; there were many sleepless nights,” he recalled.

It takes more than stamina to run 15 convenience stores and manage 200 employees. It takes passion.

This was his baby. He nurtured it along, opening his first Breez-In convenience store in Chesterfield County in 1984 and adding one store at a time.

Six months before he signed on the dotted line, he would have told you his business wasn’t for sale. He had four projects on the drawing board.

But at least four investment bankers approached him to sell, and Bogese warmed up to the idea.

He could be free from the day-to-day hassles of running a business. He could focus on the big picture, developing commercial real estate properties.

“I know why you sold the stores, Dad,” said his son, David, 8. “So you could spend more time with me.”

Bogese takes his son to school every morning now. He goes to nearly every soccer game. “I was always rushed before, always late and sometimes out of state,” he recalled.

Despite the advantages, selling wasn’t easy. “You do have withdrawal symptoms,” Bogese said. Once, after the sale, he caught himself telling a store worker to call an electrician to get pump No. 4 fixed.

Although he sold the operations to Miller Oil Co. of Norfolk, Bogese held on to some real estate. Instead of receiving one lump sum, he still gets income from his property.

Bogese retained the name as well. While he can never open a store with the Breez-In name, he did start Breez-In Associates, a commercial real estate and management firm in Hopewell.

He’s developing four projects he hopes to finish in 18 months.

His story is not unusual.

While the mega deals make the headlines with their eye-popping dollars, most of the merger and acquisition activity across the country is among small- and mid-size companies such as the one Bogese ran.

In 1999, about 400 U.S. deals were struck among companies valued at more than $500 million, according to Thomson Financial Securities Data, a New York research firm. By comparison, more than 4,000 deals were made among businesses valued at less than $500 million.

Demand for good, solid, growth companies is greater than supply, creating a seller’s market in some instances. Although the technology, telecom and media companies are pricey, traditional companies are a bargain by current measures, attracting inquiries, bids and buyers.

“It’s a seller’s market, particularly for manufacturing and distribution companies,” said Charles W. Byrd Jr., managing director of SunTrust Equitable Securities.

Traditional companies are popular because they have a steady revenue history and assets that are easy to borrow money against, he said. “They may not have explosive growth, but they have the potential for a nice, conservative, steady investment.”

The bull market has created wealth, giving people the opportunity to make purchases. Also, there’s a ready supply of capital from financial markets to fund acquisitions.

“The market here is very active — as active a merger and acquisition market as we have seen,” said Chris Williams of Harris Williams & Co., a Richmond investment banking firm whose market niche is transactions valued from $30 million to $500 million.

Williams attributes the boom to an extraordinary influx of capital.

Higher interest rates have yet to curb the appetite for mergers, he said. While higher rates make deals more costly to finance, buyers often put up more cash to avoid the extra charges.

“High stock values carry over into private market valuations,” said Charles Moncure of Dominion Partners, a Richmond investment banking firm focused on $5 million to $30 million transactions.

One way to determine the value of a private company is to compare it to a similar publicly traded company. The value of a public company is the total value of its stock.

People sell for all sorts of reasons: retirement, health concerns, burnout, opportunity. Sometimes it’s the lure of an attractive offer. But it’s not all dollars and cents.

“Chemistry is very important because people have built businesses over a lifetime,” Moncure said. “Sometimes the No. 2 bidder is the winner because the owner feels more comfortable with the person. The company is their lifeblood and real people depend on it.”

In some ways, selling a business is not much different from selling the family

home. There’s an emotional investment plus money, time and toil. But unlike selling a house, where you want the most exposure possible, confidentiality is paramount.

“Most neophyte buyers think it’s like buying real estate,” said Edwin C. Luther III, owner of Sunbelt Business Brokers Richmond, which handles transactions valued up to $2 million.

“If word gets out, it can be the kiss of death,” he said. “People hate change. Employees get nervous. Competitors could try to use it against you.

“We’re always talking in code. We can’t tell anyone the name of a business or where it is.”

Buyers sign confidentiality agreements, promising not to disclose the name of the business.

The market pressure to consolidate is intense, said George W. Rimler, professor of small business and entrepreneurship at Virginia Commonwealth University. But business owners shouldn’t be too quick to jump, he said.

“Family businesses are being sold, but the people don’t seem to be very joyous about it. I suspect if they had developed strong strategies and internal structures they could survive just fine.”

Besides, not all consolidations are working. Early deals in construction-related businesses, for example, were overpriced, investment bankers say. Major players in the funeral home businesses are also looking at red ink.

But these seem to be the exception, as mergers and acquisitions show few signs of slowing. Although the overall number of mergers dropped in 1999, because of Y2K fears, industry experts say the pace is likely to pick up again this year.

Even once-fragmented industries are pooling resources.

A year ago, Mike Valentine ran his business like most electrical contractors — as an independent operator. Now he’s part of a national company, instantly gaining 80 partners across the country.

He and his wife, Kerri, started Valentine Electrical in 1982 with one truck and a few supplies. They built the business into a major industrial electrical contractor in Virginia, with as many as 100 employees.

“My philosophy wasn’t that I wanted to sell the company,” Valentine said. “I just recognized the opportunities to merge with a nationwide company.”

Valentine Electrical of Ashland became a subsidiary of Integrated Electrical Services Inc. of Houston. Valentine is president, and his wife is chief financial officer.

“If there is a downside, I haven’t seen it yet,” he said.

Besides inheriting a network of peers, Valentine benefits by being able to bid on national contracts and to purchase supplies at reduced rates.

He shrugs at the financial scrutiny of being part of a publicly traded company. “It’s a good thing — helps keep the wheels on the road by looking forward.”

Five years ago, 70 percent of business owners wanted to keep ownership of their companies, said Joseph J. Fahey, managing director of First Union Corp.’s Financial Planning Group. The remaining 30 percent were either unsure or ready to sell.

Today, the figures have almost flip-flopped, with only 40 percent convinced that they want to hold onto their businesses, he said.

“There’s so much consolidation that the same folks they were competing against five years ago are not the same ones they’re competing against today,” Fahey said.

Either way, people need financial plans to minimize estate and corporate taxes when a company changes hands. Heirs could net only 30 cents on the dollar, if no plan is in place, he said.

“Everything in selling a business has tax consequences,” said Lou Einwick Jr., a senior consultant for Cornerstone Financial Management Inc. of Richmond.

“It’s not just about the sale of the business, but how you structure the sale, whether it’s a sale of assets or a stock sale or a combination.” Einwick values businesses for purchase or sale, looking at assets and liabilities as well as ratios involving cash flow and revenue.

Some buyers are strategic investors, buying a business that can be aligned with other business interests or goals. Others are financial investors looking for as much as a 30 percent return on their money in three to five years and a quick exit strategy.

Sellers go through business brokers, business intermediaries or investment bankers, depending on the size and complexity of their business.

Business brokers typically deal with businesses valued at $1 million or less. Often, the small-business owner becomes the banker, carrying the loan for the buyer. Only one in five businesses at this level actually sells.

“Business brokers get a lot of tire kickers,” said George W. Sydnor Jr. of Alpha Omega Partners Inc., a business intermediary working with company transactions valued in the $750,000 to $20 million range.

The bigger the company, the more focused the sales effort and the greater the chance for a qualified buyer, he said.

While a one- to two-page summary might work for a business listed with a broker, a 50- to 100-page document is prepared for a larger company.

The document contains financial information, a description of management, an assessment of the marketplace and descriptions of customers and competition.

Fees vary depending on the size of the transaction. A typical fee for a small business is 10 percent, compared with 6 percent commission for the sale of a home.

Targeted approaches for larger companies in the middle market range require upfront costs to prepare the memorandum, in addition to commissions and legal fees.

In shopping for a business, the key is fit.

Steve D’Andrea looked at restaurants and retailers, before settling eight months ago on Molly Maids of Richmond.

“I want a growth business with clean books, which is difficult to find,” he said. “It turned out that a business like a maid franchise delivered everything I wanted.”

It took him four years to find it.

“I spent 15 years in Corporate America and did well, but I wanted to be my own boss,” said D’Andrea, formerly in sales and marketing for Reynolds Metals Co.

He advises prospective business owners to tear the numbers apart, go to a certified public accountant and tear the numbers apart again. “That’s the only way you’re going to protect yourself.”

The buyer should be assured that no financial games are being played, that taxes are paid and profit is true, he said.

While the maid business is not as lucrative as he would have liked, he said he has no regrets. “It’s so much easier to get up in the morning.”

Copyright (c) 2000, Richmond Newspapers, Inc.

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