A business enterprise, like any asset, is worth what a buyer is willing to pay. Buyers ask countless questions, but they are primarily concerned with a fair return on their total investment. In addition, prospective buyers make many judgments about market position, proprietary know-how, competitive strengths, quality of the assets, growth potential, and risks of the business.
A professional business broker helps the business owner determine the true value of the business, and, more importantly, can help prospective buyers understand the reasons for such value and structure a sale that maximized the benefits to buyers and sellers.
Sound working relations with employees, customers, suppliers and bankers are important factors to a company. Any premature indication of a possible change in ownership could disrupt these relationships and weaken the company’s competitive position. For these reasons, and many others, confidentiality is critically important at all stages. With the proper procedures, it is possible to minimize the risk of an untimely disclosure.
In every transaction, there is an appropriate time to reveal that a sale may be imminent. Proper timing of these sensitive announcements can contribute to a smooth transaction and reinforce the buyer’s willingness to proceed to a closing.
A professional business broker helps to insure that all information about the business is kept confidential throughout the entire selling process until it is appropriate to reveal that a sale is forthcoming.
What are the benefits of using a broker to sell my business?
There are several balance sheet valuation methods, including adjusted book value, book value and liquidation value. The adjusted book value is determined by revising the asset’s book value to reflect the cost it would take to replace the assets in their current condition. This method requires the total values to be offset against the sum of the liabilities.
The book value considers the figures from the company’s financial records, as depreciated at the time of the sale. The book value can pose some difficulties for sellers, particularly if the seller has depreciated the assets to gain prior tax advantages.
The liquidation value is the amount that could be realized if all assets – equipment, furnishings and inventory – were sold separately. This value is typically much lower since it doesn’t consider a company’s intrinsic value.
The income approach takes into consideration the company’s level of earnings using a capitalization rate, discount rate or multiplier. Several income approach methods are frequently used. Each method requires a level of earnings and a conversion factor to translate the earnings into a company’s value. Selecting the proper level of earnings – after-tax, pretax, discretionary or cash flow – and matching it with the proper conversion factor – discount rate, cap rate or a multiplier – is critical to calculating a reasonable value.
The market approach sets a value based on the values of other businesses that have been sold. Setting the market value involves researching the sale prices for similar businesses in a geographic area. In some cases, however, finding a company that is similar in many ways to your company may be difficult.
Whatever your goal, you want a good advisor to help you assess the value of your company. Question your advisor on the effects of deal structure and how multiples are used. A business owner should never accept a computer-generated valuation or a one-size-fits-all approach when selling the business. And don’t be impressed by the person who presents the highest value – you may only be setting yourself up for failure during the sale process.
The typical business owner will only sell a business once. Understanding the complex process involved will help produce the best results, but don’t fall prey to the myths that can derail or seriously affect a potential sale.
The market approach sets a value based on the values of other businesses that have been sold. Setting the market value involves researching the sale prices for similar businesses in a geographic area. In some cases, however, finding a company that is similar in many ways to your company may be difficult.
Whatever your goal, you want a good advisor to help you assess the value of your company. Question your advisor on the effects of deal structure and how multiples are used. A business owner should never accept a computer-generated valuation or a one-size-fits-all approach when selling the business. And don’t be impressed by the person who presents the highest value – you may only be setting yourself up for failure during the sale process.
Certainly, an owner wants to be sure he or she is mentally and emotionally prepared to sell. But personal readiness is just one factor. Economic factors can have a significant impact on the sale of a business.
Sale prices can be affected by industry consolidation, interest rates, unemployment and many other economic measures. Talk with a professional and aim to sell when your personal goals and market conditions align.
Some owners will base the company value on what they need for retirement. Others will tell you they want $100,000/year for “sweat equity.”
A third party valuation is a good idea for anyone seriously considering the sale of their business. An outside valuation will include a thorough analysis of the business and the market it operates in. This will provide a solid understanding of the company’s growth potential, not some vague industry average.
Selling a company is much more complex than selling a house. A successful business sale usually requires a great deal of pre-planning, at least a year and maybe as long as three years to drive sales, develop key staff, document the operations and control expenses.
The average house will sell in less than four months, while the average business sale is nine months to a year.
Even after the business is sold, the seller can be expected to put in at least a few months, and possibly years of transition time, helping to make the new owner a success.
What are the key steps to a successful business search process?
Buying a business is a process that takes time. It can sometimes take years to find the right opportunity. There are some key steps to follow in the business search process:
Merriam-Webster Dictionary defines due diligence as “research and analysis of a company or organization done in preparation for a business transaction.” Ultimately, due diligence is the process of being sure that things are as they appear before a deal is sealed. For someone considering a merger or the purchase of an existing business, the review of documentation and the answers to your due diligence questions are critical. There’s no doubt it is a complex process that can be time-consuming, but with so much on the line with any merger or acquisition, you don’t want to make a decision without all of the information. You want to be sure everything is reviewed and all questions are answered to your satisfaction.
During the due diligence process, an often lengthy list of documents should be provided. The list of documents should cover a range of areas, including:
Today more than ever, buyers are putting more emphasis on the due diligence process, and while the financial aspect is a key component, the due diligence process should also consider organizational items. Be sure to seek documentation and ask important questions about the company’s culture, strategy, leadership and competencies.
Although the due diligence process may take considerable time, it’s a critical part of any transaction and should be considered the foundation of the entire deal.
The evaporation of small business capital markets and other economic factors have made creative financing the norm for today’s business buyer. There are a number of creative financing options that you can consider.
Increasingly, buyers and lenders are looking to the seller for financing as they try to put a transaction together. In such a scenario, the seller will hold a note at an agreed upon interest rate for a specific term or amortization – generally ranging from five to 10 years. The terms of the sale may include a balloon payment three to five years after the purchase date. It’s a way of giving the buyer time to get up and running and to establish a successful track record with the business. Seller financing makes the bank more comfortable with the transaction. Lenders know they have a seller who has a vested interest in the success of the business rather than one who will take their money and run. There are a number of benefits for business owners who are considering seller financing:
Fast sale
Flexibility
Tax Breaks
Protections
In business sales, conventional bank loans may not be available, so a buyer may want to consider going to a Small Business Administration (SBA) lender, which has a number of loan options. The SBA guarantees a portion of the loan. The buyer pays an SBA loan fee that allows him or her to get funding for a loan the bank couldn’t do conventionally. If an SBA guaranteed loan goes into default, the SBA will pay the lending institution up to 75 percent of any deficit left after liquidating the collateral. There have been several changes to the Small Business Administration’s lending guidelines and standard operating procedures. You will want to speak with an advisor who is familiar with these recent changes.
Earnout financing involves a certain dollar amount agreed on by the buyer and seller to be paid to the seller based on the performance of the company after the transaction is completed. Earnouts can be structured in a variety of ways and can be based on different financial benchmarks such as a company’s revenues, gross profits or net income. Earnout financing is often used for companies that are in a turnaround situation or when buyers are purchasing on potential, rather than on historical cash flow.
In mergers and acquisitions, mezzanine financing is another alternative for a buyer looking for capital where the financing package may include interest rates of 20 to 30 percent. The lenders in this situation are typically high net worth individuals who are expecting a larger return on their investment. They are lending in a junior lien or a position behind the bank and seller financing. The loans are typically made with limited sources of collateral, thus the request for higher interest rates. Again, this financing is often used in funding goodwill or reputation in an acquisition.
In a million dollar transaction, the buyer would be expected to have a 20 percent down payment. The seller may hold an additional 10 to 20 percent in seller financing, and the lending institution would offer a combination of conventional or SBA financing to cover the difference, depending on collateral available. A buyer and the lending institution must evaluate a company’s cash flow and determine if it is adequate to cover their debt service and provide a reasonable return on their investment. Lending institutions will also be examining whether a buyer’s coverage ratio, or excess cash flow after all debt is paid, is adequate to cover their needs.
So you want to be your own boss. There are certainly pros and cons to both buying and starting a business. If you do a careful analysis, you’ll learn what many seasoned entrepreneurs have discovered…the risk-to-reward ratio is tipped in your favor when you purchase an existing business.Starting a business of your own can pay great dividends, but it’s important to understand that the risks are significant. Most start-up businesses will falter and eventually die. According to Michael Gerber, author of The E-Myth Revisited, 40 percent of new businesses fail in the first year and 80 percent fail within five years.On the other hand, purchasing an existing business reduces an entrepreneur’s risk while creating opportunities for tremendous profit. There are a number of reasons to consider the purchase of an existing business rather that starting one:
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