Buying a Book of Business

Outside of a dog, a book is man’s best friend. Groucho Marx

Your business is doing well. So well, that you’re thinking it’s time to expand. One possibility is to slowly continue to build the business by adding customers or clients one at a time. Another possibility is to quickly add new customers or clients by acquiring a book of business from another company. This article will examine some of the issues involved in acquiring a book of business.

Finding the book

Locating the book of business may be one of the more difficult parts in acquiring a book. There are four common sources of finding a book of business to acquire:

  • Networking
  • Competitors
  • Business brokers
  • Investment bankers

The least expensive, and perhaps the best, way to find a book of business to acquire is to find it yourself.

It’s generally advisable to engage in professional and social networking. It’s a good way to expand your knowledge and learn what others are doing. It’s also a great way to make contacts that may eventually lead to an acquisition.

Networking, however, tends to be long term. It can take years before results are achieved. And some people, no matter how hard they try, just are not very good at networking.

An alternative, then, is to turn to a business broker or finder or an investment banker.

Conducting due diligence

Once found, you’ll want to fully investigate the book of business before you agree to purchase it. This investigation—to minimize the risk that your acquisition is not what you expected—is known as due diligence.

The conduct of your due diligence should include at least the following:

  • Seller’s financial and personal background
  • Books and records
  • Evaluation of customers or clients

The due diligence can be conducted before or after a definitive agreement is signed.

How much to pay

The amount that you will pay for the book will be negotiated by you and the seller. As a shortcut method of valuation, people often look at the price as being equal to a multiple of revenue or EBIDTA. But this is just a shortcut. The actual value of a book of business cannot be truly derived by applying a simple multiplier. Each company—and especially its mix of customers or clients—is unique. The parties need to review and break down the demographics of the customers or clients.

The key factors to evaluate are the age of the customers or clients, the services and products being purchased by the customers or clients and the location of the customers or clients.

In addition, you’ll want to consider whether the seller’s customers or clients are a ready source of additional business. Do they have children who are now or may in the future be the next generation of customers or clients? Have the customers or clients historically been a ready source of referrals?

If necessary, an outside valuation firm or accountant can be hired to place a value on the book of business.

Signing the definitive agreement

You and the seller should enter into a definitive agreement. The purpose of the agreement is threefold:

  • To memorialize your actual agreement
  • To create a road map for closing the deal
  • To govern in case of dispute

Depending on the deal with the seller, the agreement may include certain seller covenants, including agreements by the seller that it will not solicit the clients being sold to you or will help you transition the customers or clients.

In any event the agreement will provide for the method and timing of payments that will be made to the seller.

Paying for the book

It’s customary that at least a portion of the purchase price be paid at the closing of the acquisition. The balance may be paid over a period of time in the form of fixed payments or earn-outs or a combination of both. The buyer may also issue or assign equity to the seller for part or all of the purchase price.

Fixed payments and equity are pretty straightforward, but what’s an earn-out? An earn-out is a way for the seller to be paid based on the future performance of the book of business being sold. The more the book earns for the buyer, the greater the payment to the seller. And contrariwise, the less the book earns, the less the payment to the seller. The earn-out shifts some of the risk from the buyer to the seller. It’s a real option, especially when the seller agrees to help transition the customers or clients to the buyer.

Alternatives

Acquiring the book of business is not the only option. There are alternatives.

One possibility is to purchase more or all of the business, not just the book of business. Are there personnel that you wish to bring on board? Are there facilities or systems that you might wish to use? If so, consider acquiring the business, not just the book.

Purchasing a business will be a lot more complicated than just purchasing a book of business. The definitive agreement will need to be longer and more comprehensive; the due diligence review will need to be more extensive. And, of course, following the acquisition, it’s a lot more difficult to integrate a business then it is a book of business.

Referrals

A second possibility is to acquire the book of business indirectly, instead of making an outright purchase. The book can be acquired by accepting referrals from the “seller,” instead of purchasing it outright. The seller, as a referrer or solicitor, would sign a proper solicitation agreement with you. He would then receive a portion of the fees you receive from each of the referred clients. The fees can be a fixed amount or a percentage. They can run from one year to five years to forever.

You may be concerned that the book of business is somehow tainted, that the seller may not quite have the freedom to transfer the book to you. This can be a real issue when the seller is working for another firm; the customers or clients technically (and legally) may belong to the firm, not to the “seller” who has the real relationships with the customers or clients.

Conclusion

Now may be the time to expand your business by acquiring a book of business. I hope this article sheds some light on the issues involved.

Inside of a dog it’s too dark to read. Groucho Marx

— Alan N. Walter

A Checklist of Major Buy/Sell Considerations

No two deals are alike. However, it’s useful to at least think about the following items when shaping and negotiating a deal.

1. Finding the buyer or seller

a. Networking, professional and social

b. Competitors

c. Business brokers

d. Investment bankers

2. Useful professionals

a. Lawyer

b. Accountant

c. Investment banker

d. Tax advisor

3. Before serious negotiations and discussions begin, consider

a. Entering into a confidentiality agreement

b. Requiring no communication with customers, clients and employees about the possibility of a deal – to avoid damaging relationships

c. Agreeing not to “shop” the deal elsewhere

4. Identify what’s being bought and sold:

a. Book of business

b. Entire firm

c. Certain customers or clients only

5. Asset vs. equity purchase and sale

6. Valuation

a. Negotiated

b. Multiple of revenue, EBIDTA or something else

c. Third party appraisal

7. Letter of intent—non-binding, but useful to set out parameters of deal

8. Non-disclosure agreement

9. Purchase and sale agreement.

a. Purpose:

i. To memorialize agreement

ii. To create road map for closing

iii. To govern in case of dispute

b. Some contract terms

i. Representations and warranties

ii. Covenants

A. Seller not to solicit old customers or clients

B. Seller not to compete?

C. Seller to help transition customers or clients

D. Seller continuing as consultant

E. Need for key personnel at seller to continue

iii. Payment options

A. Cash down

B. Earn-outs

C. Equity as payment

10. Consider approvals needed

a. Board

b. Equity owners

c. Lender

d. Contract partners

11. Financial due diligence

a. Financial statements

b. Tax returns

c. Extraordinary or non-recurring revenues and expenses

d. Excess owner compensation and benefits

e. Undisclosed liabilities

f. Strategic and value-added components

g. Reductions or additions for contingent events

h. Tax consequences of transaction

i. Allocation of purchase price

12. Some other major items of due diligence

a. Principals’ and key employees’ financial and personal background

b. Books and records

c. Past and present litigation

d. Past and present regulatory actions

e. Intellectual property

f. Tangible assets

g. Evaluation of operations

h. Evaluation of customers or clients

i. Environmental audit (if physical plant being acquired)

j. Evaluation of employees

k. Lien searches

13. Availability of financing

14. Necessary filings and approvals

a. Regulatory

b. Bulk sale

c. Contractor and creditor approvals

d. Antitrust (Hart-Scott-Rodino)

15. Closing

a. When and where

b. Contingencies

16. Post-closing

a. Transition of customers or clients, including assignment of customer or client agreements

b. Transition of management

c. Retention of certain of Seller’s employees

d. Possibility of maintaining Seller’s office

e. Updating of business continuity plan

f. Updating of succession plan

g. Regulatory follow-up

Please feel free to contact me, if you have any questions or comments.

Alan N. Walter, 973-937-8636, alan@waltercounsel.com, www.waltercounsel.com

An Overview of Equity Crowdfunding and Private Offerings

I recently presented an overview of equity crowdfunding and private offerings to the New Jersey Economic Development Authority’s Commercialization Center for Innovative Technologies.

I discussed basic securities law and the many options available to businesses to raise funds.

If you would like a copy of my Powerpoint “slides,” please fill out the fields below.

— Alan N. Walter

Booyah! SEC Issues Final Crowdfunding Rules

64Px - 011CrowdfundingAt long last, the SEC has adopted final rules to allow companies to sell securities through equity crowdfunding. If all goes as expected, the rules will go into effect on January 29, 2016.

The highlights:

  •  A company could raise up to $1 million is a 12-month period.
  • Individual investors with annual income or net worth under $100,000 could invest the greater of $2,000 or 5 percent of the lesser of their annual income or net worth.
  • Individual investors with both annual income and net worth over $100,000 could invest 10 percent of the lesser of their annual income or net worth.
  • The maximum amount an investor can acquire over a 12-month period is $100,000.
  • Securities purchased via crowdfunding would need to be held for a year.
  • Funding portals would need to register with the SEC and become a member of a national securities association.
  • Crowdfunding companies must disclose certain information to investors, the SEC, funding portals and other facilitating intermediaries.

I’ll post more after a full review of the final rule.

— Alan N. Walter

A Simple DIY Guide to Starting Up an LLC

blocks-2bwblocks-2bwPlease note the “simple” in the title.

Look, I know that you want to save money and do it yourself. But this may be penny-wise and pound-foolish; there are nuances and details you may miss. Think about engaging a lawyer.

There are lots of different types of entities and lots of different states. We’re going to stick to limited liability companies, for now, as most new entities are LLCs. We’re also going to stick to New Jersey, as that’s where I usually sit.

From Soup to Nuts

There are five basic steps that should be taken in setting up an LLC:

  • Name
  • Formation
  • Tax ID
  • Registration
  • Operating Agreement

If you feel uncomfortable doing any of this, consult a lawyer. (That’s what we’re here for.) In any event, I would highly recommend having a lawyer prepare your operating agreement.

The Name

First you’ll need to pick a name for your LLC.

Your name is something indicates that identifies and distinguishes your goods or services. It’s your brand.

It’s beyond the scope of this post to go too much into the details of trademarks and tradenames. Generally speaking, if you wish to have trademark protection for the name of your LLC, you need to avoid names that are purely generic names, such as Computer, or descriptive names, such as Teledoctor. You can combine these words with other words and probably get protection.

Ok, pick a name.

Read more

Equity Crowdfunding Delayed to January 2016

64Px - 011CrowdfundingLet’s see if I have this right:

The JOBS Act became law in April 2012. Included as Title III of the Act was equity crowdfunding, a way for small and medium-sized to 64Px - 011raise money quicker and cheaper than traditional methods. A need that Congress desired to have satisfied in a timely manner.

Congress gave the SEC nine months to implement Title III equity crowdfunding.

Time passed.

Eighteen months after the JOBS Act was enacted, in October 2013, the SEC proposed rules for crowdfunding. The deadline for gathering comments from the public would have expired in February 2014.

More time passed.

The SEC has now scheduled its final stage for crowdfunding rules for October 2015. Presumably, implementation would follow about three months thereafter in January 2016, only three years after the law required.

Now, it may be that we shouldn’t take the SEC seriously, that it has simply given itself wiggle room. We’ll see.

As more time passes.

– Alan N. Walter

How to Succeed in Business

die_a_littleYou may have heard of this guy who lives used to live in my town Montclair, Yogi Berra. Yogi’s famously known for his words of wisdom, including:

“You’ve got to be careful if you don’t know where you’re going, because you might get there.”

Every business, new and old, needs to know where it’s going. Businesses can pivot all they want, but they still need to deal with succession. How can an entrepreneur or other person pass on his or her business or at the very least realize the value in the business?

It’s a classic problem. An entrepreneur works his or her whole life building a business. It’s very difficult for the entrepreneur to realize that it’s time to start transitioning the business, to support others in the running and further building of the business.

An owner who has failed to consider succession planning has not just failed him or herself or the business—the owner has also failed his family and his employees and his customers.

What is Succession Planning?

Succession planning can take many different forms. But there are basically four different options. The first is an internal succession plan with partners or key professional employees. The second is a merger with another firm. The third is the bringing in on a new employee or partner for an eventual buy-out. And the fourth, the least desirable, is the winding down of the business.

Read more

Raising Money Under Title II of the JOBS Act

Until recently, new companies wishing to raise money – that had exhausted their 173px-Man-and-woman-icon-alt.svgsources from friends and family and had no access to angel or venture capitalists – needed to rely on the SEC’s Regulation A or D, regulations promulgated under the federal Securities Act of 1933. Nothing wrong with that, except that offerings under Regs A and D need to satisfy a whole slew of conditions, some of which are expensive and some of which are just plain annoying.

Congress recognized the limitation in offering possibilities and passed the JOBS Act two years ago as a means of expanding the universe of options. The rules and regulations needed to effectuate the Act are (ever so) slowly being adopted.

While we’re waiting for the SEC to issue final regulations for equity crowdfunding, Title III under the JOBS Act, and for Reg A+, a liberalization of Reg A, there are other possibilities. Companies may want to consider raising funds under Title II of the JOBS Act. Compared to traditional Reg D and Reg A offerings, Title II or Rule 506(c) offers a streamlined and cheaper method of raising money.

What’s good about Rule 506(c)?

Read more

Is Your Operating Agreement Complete?

bombYou and your partners are successfully running your business. After talking to your accountants and lawyers – I am always hopeful – you decided to operate your business as a limited liability company and entered into an LLC operating agreement.

This operating agreement governs your relative rights and obligations.

I’m fairly certain that your operating agreement addresses capital contributions, distribution of cash flow, voting rights and management. And it probably also addresses transfers of membership interest, the admission of new members and the exiting of existing members.

However, the agreement may be sorely lacking in other areas. Does it, for example, address:

  • what happens if a member dies, or becomes disabled
  • how membership interest is valued at various trigger events
  • the fiduciary duties of the managing members
  • how a managing member may be removed and replaced
  • the limitations or rights of a managing member to engage in outside business activities
  • the obligation, if any, of a member to turn over business opportunities to the LLC

Read more

Equity Crowdfunding: Best Recent Articles

Here’s the best of the recent articles on equity crowdfunding:Crowdfunding64Px - 011

Meet 7 Angel Investors Who Love Crowdfunding – Forbes
Fri, 02 May 2014

Crowdfunding is an incredible tool for entrepreneurs seeking capital at any stage of their business. Startup businesses can validate their idea through a rewards crowdfund, giving them great traction …

Read more …

24Px - 011Online Solar Marketplace Raises $1M In Equity Crowdfunding – Forbes
Thu, 01 May 2014

Let’s just say solar power social entrepreneur David Levine owes a big “thank you” to the Jumpstart Our Business Startups Act (JOBS). Passed in 2012, it allows start …

Read more …

24Px - 011Why Fraudsters Won’t Sink Equity Crowdfunding – Entrepreneur
Tue, 22 Apr 2014

To those who fear that opening up equity crowdfunding to unaccredited investors will result in rampant fraud, some experts in the space say: Don’t underestimate the crowd….

Read more …

 

— Alan N. Walter

Invest in next Facebook…for a few bucks – CNNMoney
Mon, 14 Apr 2014

The formal name for this is equity crowdfunding, and the process has already begun for “accredited” investors. Right now, the SEC defines an “accredited” investor as someone who makes more than …

Read more …

24Px - 0115 Things To Know Before Starting An Equity Crowdfund – Forbes
Mon, 28 Apr 2014

Unlike the rewards-only crowdfunding offered by sites like Kickstarter, equity crowdfunding allows companies to exchange a percent of ownership in exchange for funding. Equity crowdfunding is …

Read more …

24Px - 011Frustration Rises Over Crowdfunding Rules – Wall Street Journal

Thu, 01 May 2014

One big problem, critics say, is that it will be difficult for entrepreneurs to tap their social networks to raise money to buy equipment, add staff or upgrade to a new of …

Read more …