Buyer Cash Flow / SA News

This newsletter brings to interested business brokers, financial intermediaries, buyers and sellers important updates, news items, user comments and suggested deal structures for actual businesses for sale. Please feel free to send us comments and questions of a general nature and concern for all users of BCF/SA.

Simplifying the Done-Deal Zone
StarMan Ratings for Your Listing/Transaction
So What Does 'Chance' Have to do With Anything?
Case study #4: Manufacturing firm

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We've replaced the complicated explanation of the "Done-Deal Zone" with the simplified chart shown below.

First you will notice that the P/E and IRR values are shown along side the bottom and side of the "Zone Map". As stated in the last issue, P/E is the price to SDC ratio and IRR is the Buyer IRR as calculated by the BCF algorithim. Next you can't help notice the map which represents those combinations of P/E and IRR that will put your deal within the Zone , the inner rectangle; in the 5% chance zone, the Blue Rectangle; or in that in-between zone of 10% chance, the middle rectangle. For example, a Service business with a P/E of 3.6 and IRR of 1.8 (180%) will put you in the middle rectangle or 10% chance zone; and a P/E of 1.8 and IRR of 1.0 (100%) places the deal right in the Done-Deal Zone.

As a further help we made use of a "traffic light" symbol to show jsut where the P/E or IRR value falls. The color of the circle will be either Green, Yellow or Red representing the Done-Deal Zone, the 10% zone and the 5% chance zone, respectively. In the examples given above the P/R 'light' would be Yellow in the first case and Green in the second case. The IRR 'light' would be Yellow in the first case and then Green. A complete explanation is found in the BCF Manual.

Finally, the "AB" shown represents the StarMan Rating for the deal based on the P/E and IRR combinations. More on this in the following section.

A FREE 30-day evaluation program is available for downloading -- so give it a whirl!

You may be saying, "This is not a lottery, it's serious business!" Well, statsistics reflect history -- what has happened in the past. It assumes that those numerous and various factors are still at work and have not changed, and, therefore, the future should be like the past. At least in terms of 'like chances'.

Let's look at the recent the Miami - Georgia Tech Bowl Game. GT has the best offensive record ever - over 40 points per game. But, if Miami scores on their first drive they won 92% of the time. Miami scores on their first drive; GT has only an 8% chance of winning. That's slightly better than picking the winning number from 0 - 9 -- pretty strong odds. Would you bet on GT winning? Did they win?

Would you 'bet' your commission by going against the odds and structuring a deal outside the Done-Deal Zone?

Why rate a listing? Because it can help you, as a broker, to get a better listing. In the long run it will help your Seller, too. Getting the best price is not restricted when you use the BCF approach. What BCF does is to help the Seller, and Buyer, too, get the best price for the business -- understanding that a good solid deal is in everyone's best interest. Getting the highest price is not necessarily the best deal given that almost all our sales do not include audited financials. The buyer must relay on what is provided and even with the help of an accountant it would difficult and expensive to conduct an audit as part of "due diligence".

In this environment of ours the best course is a WIN-WIN deal. Personally, laws that say we must represent one or the other do not help the consumer (buyer) or society since it basically says to the buyer that he's on his own without protection -- at the mercy of the Seller.

How does a Rating help? It focuses your attention on the financials and permits you to educate your Seller and/or Buyer. It lets you, the broker, know what type of job you did on the listing -- AA or CD. You can explain to the Seller/Buyer that based on some 1000 transactions from 1989 -1998 in the western US, here's where his potential sale stands.

In Arizona, about 63% of 390 listings studied were "rated" (having the 3 - 5 factors in the listing). Some 22% of these were rated "AA", the highest. Some 47% were rated with an "A" as the first letter, indicating that they were in the Done-Deal Zone. I would say there is room for improvement!

Details regarding how the ratings are determined can be found in the BCF Manual.

Initial Listing Data		Adjusted Data
Price	$150k	Price	$90k
Down	$75k	Down	$50K
ADJ CASH FLOW	$35.9k	ADJ CASH FLOW	$35.9k
Gross sales	$255k	Gross sales	$255k
COG	$153k	COG	$153k
Expenses	$66.1k	Expenses	$66.1k
Adustments	0k	Adustments	0k
BUYER IRR	18%	BUYER IRR	52%
BIZ IRR	96.0%	BIZ IRR	96.0%
P/E	4.2	P/E	2.5
StarMan Rating	CC	StarMan Rating	AB

Here we have a service firm asking a very high price for its SDC -- P/E of 4.2. Its StarMan Rating is "CC" is caused by a RED P/E factor and Yellow IRR (18% just made it into the middle zone). The second "C" represents a debt service greater than 33% of the cash flow (to payoff the seller's note). After some analysis several possobilities ewere found with a BC or BB rating and others in the AB zone. We choose the above deal structure because it gives the seller a higher price than the others. Notice, though, the Buyer still has over 25% debt service (the B rating).

Will the Seller go for it? Can the broker educate the Seller? Depends . . . Depends on other non-financial factors that can perhaps be influenced to arrive at a deal -- "I need the $75K down for another business". Try it. Do an anlysis with $75 down and see what you can come up with to keep your seller happy. If so, can you keep your buyer happy or find another ready, willing and able buyer?

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