May 19, 2022

You’re the Boss Blog: Business for Sale: Putting a Price on an I.T. Company

Creating Value

Are you getting the most out of your business?

Occasionally in my posts, I like to take a look at businesses for sale, which can offer important lessons for both sellers and buyers. For this post, I have selected an information technology company that is based in the southeastern United States. It employs 14 and says it is on track to do about $30 million in sales this year.

As with my earlier posts on businesses for sale, I have no stake in the sale of the business, nor do I certify that any of the information about the business presented is accurate. The information provided came to me in the form of the public listing and through conversations with the selling broker.

This business specializes in providing the infrastructure and backbone equipment for data-processing centers. One third of its business is done with the federal government, one third with state governments and one third with private enterprises. That split allows it to have a smooth sales cycle. Often when one segment is roaring, another is slower than the owner would like.

The business came to my attention through its broker, Murphy Business and Financial Corporation. Generally, Murphy Business and Financial lists all businesses for sale on In this case, the broker, Matt Slappey, concluded that given the size of the business and its probable selling price, a better strategy would be to sell the company through a controlled-auction process.

A controlled auction is a sales process that encourages potential buyers to submit offers. The process is used to weed out buyers who are not qualified and to engage buyers who would be a good match. The goal is get potential buyers to bid against each other and increase the selling price. It works best when, as is this case with this company, several qualified buyers have expressed interest.

Broker: Mr. Slappey

Type of Business: Valued-added reseller of I.T. equipment.

Employees: 14 full-time.

Location: Southeastern United States.

Asking price: Buyers will make offers in controlled-auction process.

Fixed Assets: Few. No real estate.

Intellectual property: Knowledge of bidding process for government contracts. The company has a preferred relationship with several companies, including Cisco Systems, Dell Computer, VMWare and EMC.

Reason for selling: The owner is 62 years old. He expects to stay with the buyer for two or three years and wants to be able to leave by the time he’s 65.



Business Overview

The owner started the business in 2006. He has a sales force that is based in several cities and backed by quality engineers who focus on the pre-sale process, installation, and customer training. Some 80 percent of the company’s sales come from hardware, 20 percent from service contracts.

The sales team is motivated through an incentive compensation system that rewards new sales. The company has developed strategies for winning government contracts. Suppliers recommend the company because it has built relationships with primary vendors.

The owner has developed strategies to identify government entities looking for the products and services that the company provides. He believes that the right buyer could accelerate the company’s growth.


The company has little in the way of recurring revenue. A buyer will want to spend time in due diligence understanding the sales process and how the company finds new business. The company possesses important intellectual capital that it will be important for a new owner to learn. A buyer will need to develop a methodology to get this information from the owner and systematize the sales process.

Sales Strategy

One of the most interesting things I learned speaking with Mr. Slappey concerned the way he is handling the sale of the company. Along with using a controlled auction, he is also using an unusual method to collect his “success fee” on the sale. Most business brokers use what is called a Lehman scale to calculate the fee. Mr. Slappey is using a reverse Lehman scale, which means the more money he sells the business for over an agreed upon amount, the higher the percentage he will receive from the seller.

It is also worth noting that Mr. Slappey will receive his commission payments at the same time the seller gets paid. If the seller receives 100 percent of his money at closing, so will Mr. Slappey. If the seller receives 80 percent at closing and 20 percent over five years, Mr. Slappey will do likewise. This aligns incentives for seller and broker.

My Take

If I were the buyer, I would be very careful in negotiating the sale. I would want either to have an earnout or to place a reasonable amount of the sales price in an escrow account. I would be concerned that some of the current owner’s knowledge may not be transferable. I would also want to make sure that significant employees were tied to the company for a particular period of time and could not leave with customers or intellectual property.

What do you think? If you were a buyer, what would you pay for this business? If you were a broker, how would you position the sale? Do you think the seller should publish an asking price? What would you want to know before you were willing to make a bid?

Josh Patrick is a founder and principal at Stage 2 Planning Partners, where he works with private business owners on creating personal and business value.

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Economix Blog: The Sequester Starts to Show

Hello, sequestration.

The monthly jobs report is starting to show the effects of the $85 billion in across-the-board budget cuts that the government needs to carry out before the end of the fiscal year in September. That’s not much in a $16 trillion economy, of course. But economists still expect it to slow growth and reduce employment in the coming months and years.

And it is. Federal employment had been on a downward trend since the start of 2011, with the government shedding about 3,000 or 4,000 positions a month through February. Then sequestration hit on March 1. And in the last three months, the federal work force has shrunk by about 45,000 positions, including 14,000 in May alone. In part, that is because federal offices have gone on hiring freezes and taken other steps to wrench down their spending.

Tens of thousands of federal workers are also seeing their hours cut through mandatory furloughs and bans on overtime. But that data is not really showing up in the jobs report, which includes data on hours for private sector employees, but not public sector ones. Still, expect those furloughs to take a significant bite out of income and consumer spending. Come July, for instance, the Pentagon is going to start to furlough 680,000 civilian workers – out of about 800,000 total – for up to 11 days each.

State and local governments have finally stopped shedding workers, offsetting some of the impact from the federal government. For each of the last three months, local governments have added employees, if only a handful of them. State governments seem to have stopped shrinking their payrolls too.

Sequestration is having an impact on private businesses as well, even if it is harder to see given the way the recovery continues to chug along. Millions of their customers have less money to spend. The government is trimming back on contracts awarded to private firms. But just because sequestration’s impact is diffuse and cumulative over time does not mean it is not there.

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Bucks Blog: Incentives to Start a 529 College Savings Plan

Students at Morehouse College's commencement ceremonies.EPA Students at Morehouse College’s commencement ceremonies.

College graduation season is in full swing, marking an annual rite of passage — and serving as a reminder that higher education isn’t getting any cheaper. One option available to help families put away money for college, and avoid borrowing too much, is a 529 college savings plan.

In general, 529 plans are college savings and investment accounts sponsored by state governments. Money deposited in the accounts grows tax free, as long as the funds are used for educational purposes when withdrawn. You don’t have to be a resident of a particular state to use its plan, although some states offer additional tax benefits to in-state plan participants.

Most 529s are designed as traditional savings-and-investment vehicles, but some states offer prepaid 529 plans, which allow savers to pay tuition at certain schools in advance at current rates.

To raise awareness of the savings plans, the College Savings Plans Network, a nonprofit group that represents the plans, is promoting Wednesday (that is, 5/29), as National 529 College Savings Day. More than 30 states are organizing events to promote their 529 plans, and some are offering incentives for families to create accounts.

Florida, for instance, is waiving the $50 enrollment fee for plans opened from May 20 through June 30.

Washington State is also waiving a $50 enrollment fee, for plans meeting certain conditions; the account must be established by midnight Wednesday.

And Utah is offering matching contributions of $25, for accounts opened on Wednesday with contributions of at least $25.

The College Savings Plans Network itself is offering a chance to win $529 toward a new or existing savings plan. To enter, you must “like” the network on Facebook.

The network has created an interactive map showing what various states are doing. To see what your state’s plan is offering, click on your state.

Do you take part in a 529 savings plan? If not, will your state’s promotional event entice you to start?

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Executive Says Crew Should Have Acted to Prevent Spill

“Do I wish the crew had done more? Absolutely,” said Steven L. Newman, chief executive of Transocean. “We acknowledged we should have done more.”

Mr. Newman’s measured and partial acknowledgment of accountability goes to the heart of the United States District Court trial, now in its fourth week, to assign responsibility for the disaster.

Mr. Newman said that while his company was responsible for a “narrow slice” of the drilling operations, including providing pressure tests that produced faulty readings before the explosion, it was the oil company BP that “has everything under its umbrella.”

The trial bundles suits brought by the Justice Department, several state governments, private businesses and individual claimants against BP and its contractors. Lawyers for tens of thousands of people and businesses seeking redress for damages claim that BP, Transocean and Halliburton are grossly negligent for mismanaging safety procedures.

The Justice Department is arguing that BP was grossly negligent and ultimately responsible for a series of mistakes because it designed the well, selected the contractors and managed the drilling operation. While BP has acknowledged mistakes, it says that its contractors also made serious errors that caused the well blowout, and over the last two weeks several trial witnesses appear to have helped make its case.

Geoffrey Webster, an expert witness in marine engineering for the plaintiffs, testified earlier that Transocean had neglected to properly maintain and operate the rig and its critical blowout preventer and did not adequately train its crew.

The crew deliberately disabled the automatic functions of a gas alarm system that should have alerted the crew to hazardous gases rising from the well, according to Mr. Webster. He also testified that the Transocean rig crew failed to use lines designed to divert the escaping oil over the side of the rig, using small, low-pressure tanks on the rig instead that were inadequate to the task.

Those errors, he said, contributed to allowing escaping oil to reach the rig deck and set it on fire, conclusions that had been documented in previous government reports.

Another contractor-defendant, Halliburton, which had mixed the cement for the well, has also faced some embarrassing questions at the trial in recent days. Thomas Roth, a senior Halliburton executive who was in charge of cementing operations at the time of the spill, acknowledged that due to the well design and other factors, “the cement placement was going to be a job that would have a low probability of success.”

Halliburton also revealed last week that it had recently found leftover samples of cement slurry at a Louisiana lab that may have been from the same mixture that sealed the well three years ago. The company acknowledged that the notes related to the samples had been discarded.

The legal ramifications of the development remain unclear since Halliburton has asserted that it provided sufficient samples to federal and state agencies over the years. But one of the plaintiff’s lawyers earlier in the trial accused Halliburton of having conducted undocumented cement tests in which results had not been disclosed. BP has accused Halliburton of destroying evidence of its cement testing.

“To shift responsibility to Transocean and Halliburton is good for BP,” said Edward F. Sherman, a law professor at Tulane University. “They would like to argue that the primary actors were Halliburton and Transocean employees and BP was not responsible for their failures and therefore BP could not be grossly negligent.”

The trial, which started in late February, is unfolding in two phases. The first will determine whether BP and its contractors were guilty of gross negligence – wanton and reckless behavior or disregard for reasonable care that is likely to cause harm or injury – in causing the accident. The second phase will determine how much oil actually spilled.

Together, the determinations by District Court Judge Carl J. Barbier will decide how much BP and the others will have to pay in fines. Under the Clean Water Act, fines could range from $1,100 for every barrel spilled through simple negligence to as much as $4,300 a barrel through gross negligence.

Talks to settle out of court appeared to have reached a stalemate.

“The window may have closed once the parties became entrenched in the litigation,” said Blaine G. LeCesne, a law professor at Loyola University New Orleans. “At this point, BP is likely to take its chances and hope the allocation of fault is spread more equally among all the defendants.”

BP has already pleaded guilty to 14 criminal charges, agreed to pay $4.5 billion in fines and other penalties and shaken up its management. It has also paid out roughly $9 billion in a partial settlement with businesses, individuals and local governments.

Because of its contracts with BP, Halliburton and Transocean are protected from most spill costs, aside from punitive damages, even if they are all found to have been grossly negligent. Transocean has already pleaded guilty to a single misdemeanor criminal charge of violating the Clean Water Act and has agreed to pay $400 million in criminal penalties. Halliburton has not settled with the Justice Department and claims that it was simply following BP’s instructions.

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Op-Ed Contributor: Worker-Owners of America, Unite!

College Park, Md.

THE Occupy Wall Street protests have come and mostly gone, and whether they continue to have an impact or not, they have brought an astounding fact to the public’s attention: a mere 1 percent of Americans own just under half of the country’s financial assets and other investments. America, it would seem, is less equitable than ever, thanks to our no-holds-barred capitalist system.

But at another level, something different has been quietly brewing in recent decades: more and more Americans are involved in co-ops, worker-owned companies and other alternatives to the traditional capitalist model. We may, in fact, be moving toward a hybrid system, something different from both traditional capitalism and socialism, without anyone even noticing.

Some 130 million Americans, for example, now participate in the ownership of co-op businesses and credit unions. More than 13 million Americans have become worker-owners of more than 11,000 employee-owned companies, six million more than belong to private-sector unions.

And worker-owned companies make a difference. In Cleveland, for instance, an integrated group of worker-owned companies, supported in part by the purchasing power of large hospitals and universities, has taken the lead in local solar-panel installation, “green” institutional laundry services and a commercial hydroponic greenhouse capable of producing more than three million heads of lettuce a year.

Local and state governments are likewise changing the nature of American capitalism. Almost half the states manage venture capital efforts, taking partial ownership in new businesses. Calpers, California’s public pension authority, helps finance local development projects; in Alaska, state oil revenues provide each resident with dividends from public investment strategies as a matter of right; in Alabama, public pension investing has long focused on state economic development.

Moreover, this year some 14 states began to consider legislation to create public banks similar to the longstanding Bank of North Dakota; 15 more began to consider some form of single-payer or public-option health care plan.

Some of these developments, like rural co-ops and credit unions, have their origins in the New Deal era; some go back even further, to the Grange movement of the 1880s. The most widespread form of worker ownership stems from 1970s legislation that provided tax benefits to owners of small businesses who sold to their employees when they retired. Reagan-era domestic-spending cuts spurred nonprofits to form social enterprises that used profits to help finance their missions.

Recently, growing economic pain has provided a further catalyst. The Cleveland cooperatives are an answer to urban decay that traditional job training, small-business and other development strategies simply do not touch. They also build on a 30-year history of Ohio employee-ownership experiments traceable to the collapse of the steel industry in the 1970s and ’80s.

Further policy changes are likely. In Indiana, the Republican state treasurer, Richard Mourdock, is using state deposits to lower interest costs to employee-owned companies, a precedent others states could easily follow. Senator Sherrod Brown, Democrat of Ohio, is developing legislation to support worker-owned strategies like that of Cleveland in other cities. And several policy analysts have proposed expanding existing government “set aside” procurement programs for small businesses to include co-ops and other democratized enterprises.

If such cooperative efforts continue to increase in number, scale and sophistication, they may suggest the outlines, however tentative, of something very different from both traditional, corporate-dominated capitalism and traditional socialism.

It’s easy to overestimate the possibilities of a new system. These efforts are minor compared with the power of Wall Street banks and the other giants of the American economy. On the other hand, it is precisely these institutions that have created enormous economic problems and fueled public anger.

During the populist and progressive eras, a decades-long buildup of public anger led to major policy shifts, many of which simply took existing ideas from local and state efforts to the national stage. Furthermore, we have already seen how, in moments of crisis, the nationalization of auto giants like General Motors and Chrysler can suddenly become a reality. When the next financial breakdown occurs, huge injections of public money may well lead to de facto takeovers of major banks.

And while the American public has long supported the capitalist model, that, too, may be changing. In 2009 a Rasmussen poll reported that Americans under 30 years old were “essentially evenly divided” as to whether they preferred “capitalism” or “socialism.”

A long era of economic stagnation could well lead to a profound national debate about an America that is dominated neither by giant corporations nor by socialist bureaucrats. It would be a fitting next direction for a troubled nation that has long styled itself as of, by and for the people.

Gar Alperovitz, a professor of political economy at the University of Maryland and a founder of the Democracy Collaborative, is the author of “America Beyond Capitalism.”

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Economix: 5 Answers from the Jobs Report

Yesterday, I posed five questions about this morning’s jobs report. Here are some answers:

1. Has the recent economic slowdown led to a slowdown in job growth?

No, at least not yet, and that’s easily the best news in today’s report. The economy added 244,000 last month. Over the past three months, it has added an average of 233,000 jobs. If you ignore the temporary Census hiring of 2010, the pace of job creation is the fastest since early 2006, almost two years before the recession began.

As Joshua Shapiro, an economist at MFR Inc., a research firm in New York, wrote this morning, “The wage and salary income that a labor market recovery, ev`en a subpar one by historical standards, provides to consumers will be key in providing fuel for ongoing economic growth in 2011.”

There remain reasons to worry. Above all, recoveries from financial crises are usually slow and uneven. High oil prices and Europe’s debt trouble aren’t helping matters. The recent rise in initial employment claims — some of which occurred after the period covered by this monthly jobs report — is an issue of particular concern. At least through mid-April, though, employers still seemed to be gaining confidence.

2. Has the crisis in Japan affected employment in this country?

Not much, it seems. Makers of automobiles and automobile parts added 3,000 jobs last month. That sector seemed most at risk of being affected by the tsunami, given the shortage of parts coming from Japan. But the addition of 3,000 jobs was little different from the recent pace of job growth.

3. Are the cutbacks by local and state governments becoming more severe — or perhaps less so?

The cutbacks continue at roughly the same pace. State and local governments cut 22,000 jobs last month. Over the last six months, the monthly average was 24,000.

4. What does the length of the work week say about business executives’ state of mind?

Businesses may be getting more confident, but they are far from wildly optimistic. The average work week in the private sector remained 34.3 hours in April, unchanged over the past three months. If businesses were on the verge of a hiring boom, an increase in the work week would be a leading indicator (given that companies often give their existing employees more work before adding new ones).

Fortunately for workers, average hourly pay did rise last month, by 3 cents, to $22.95. But it’s up only 1.9 percent over the past year. Weekly pay is up 2.5 percent. Neither pace is as fast as inflation (2.7 percent, according to the latest numbers).

5. Do the statistical details in the report offer reason for optimism?

Yes and no. The Labor Department did revise its estimate of job growth for February and March in a positive way, saying the economy had added 46,000 more jobs than earlier thought. But as these two previous posts discussed, the rise in unemployment rate suggests that the job market may not have been as healthy as some people hoped.

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European Bank Stress Tests to Hit German Banks Hard

FRANKFURT — European banks that fail a planned checkup by regulators in June will be required to present a recovery plan that could force some weaker institutions, particularly in Germany, to raise more capital or even wind down their operations, according to documents released Friday.

The European Banking Authority released more details of how it will conduct the so-called stress tests of 90 of Europe’s largest banks. The parameters include more rigorous scrutiny of the capital that banks hold in reserve in case of unexpected losses. That is in response to criticism that a stress test last year was too easy and failed to restore confidence in European banks.

Analysts welcomed what they said is shaping up as a more-thorough examination of the banking system. “The quality of capital has improved dramatically,” said Silvio Peruzzo, euro area economist at Royal Bank of Scotland. “That’s a very welcome step.”

However, the rules appear to create a problem for some German landesbanks by disqualifying a portion of the funds they now use to meet regulations on shock-absorbing reserves.

The stress tests have become a heated political issue in Germany because they threaten to impose unpleasant choices on the state governments and local savings banks that typically share ownership in the landesbanks. The economics minister of the state of Hessen, Dieter Posch, said this week that the state’s landesbank, Helaba, should boycott the stress test, which it is likely to fail.

It is not up to banks, however, whether to participate, officials said. While banks can opt not to disclose the results of their tests to the general public, they must give information to regulators as part of the stress tests and would be required to take action if they failed.

The E.B.A. said in a statement Friday that it expected any bank “showing specific weaknesses in the stress test, to agree with the relevant supervisory authority the appropriate remedial measures and execute them in due time.”

While political leaders and representatives of the landesbanks have complained about the stress tests, many economists have said that pressure is needed to force the banks to rebuild their capital reserves and avoid the risk of another financial crisis.

The European Banking Authority, created this year to replace the relatively toothless Committee of European Banking Supervisors, seems determined to conduct a more severe test of banking health, said Nicolas Véron, an economist at Bruegel, a research organization in Brussels.

“It’s really all about the implementation,” Mr. Véron said. “But at this stage they are ticking the right boxes.”

The E.B.A. said that, to pass the stress tests, banks must have a capital cushion equal to 5 percent of assets. The E.B.A. will also narrow its definition of so-called core Tier 1 equity, considered the most durable form of reserves. Only funds that would be immediately available to cover losses will qualify, the E.B.A. said.

The banking authority said that emergency government aid would still qualify as core capital. That is good news for WestLB, one of the most troubled landesbanks. Its capital buffer includes €3 billion, or $4.3 billion, it received from the federal government in a bailout.

Commerzbank, a commercial lender in Frankfurt, is another bank that received billions in capital from the German government. But the bank already said this week that it would issue new shares and take other measures to repay the aid and bolster its capital.

But the stricter definition of capital appears to be bad news for other landesbanks.

The E.B.A. would exclude so-called silent participations by other shareholders, such as the savings banks that provide a significant amount of the funds that many landesbanks use to meet capital requirements. The definition would also exclude silent participations by state governments that were not part of an emergency bailout.

The rules would mean that NordLB, a landesbank in Hanover, would have to exclude about a third of its core capital. The funds are in the form of silent participations by the state of Lower Saxony and local savings banks. The state money predates the financial crisis and so does not qualify as emergency government aid.

“Naturally silent participations are important to banks that do not have access to the market,” said Dominik Lamminger, a spokesman for the Association of German Public Sector Banks, which represents the landesbanks.

The association has maintained that German landesbanks would pass the stress tests, but it argued that it was unfair to hold the banks to a standard not yet required by law.

A spokesman for NordLB, who could not be named because he was not authorized to speak publicly about the matter, declined to comment on the stress test.

But the bank’s main owner is already taking action to strengthen NordLB’s capital, in a sign that pressure from the stress tests as well as looming regulations are in fact prompting change.

The state of Lower Saxony will convert silent participations worth €1.2 billion, or $1.68 billion, in NordLB into ordinary shares, the bank spokesman confirmed. Ordinary shares would count toward core capital for purposes of the stress test as well as for new regulations.

WestLB, based in Düsseldorf, still has other problems even before it undergoes the stress test. Joaquín Almunia, European Union competition commissioner, has said that the bank must present a detailed plan to restructure by April 15, or be forced to repay the state aid it has received.

Banks that fail the stress tests would have to raise more capital or sell some assets to reduce their level of risk. In extreme cases they might have to wind down their operations.

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