Importance of valuations when selling a business

October 30, 2009

When most business owners decide to sell and they wish to be the one to start the process, the first and obvious place to start is with a business valuation.  A business valuation gives the owner a reference point as to whether the price they hope to get for the business will be reasonable and/or achievable.

 

Some business owners choose the selling price for the business based on what they want in order to sell.  They may have a certain amount of debt they wish to retire, money they need for retirement plus an ache that makes them think there business is worth a certain amount of money.  Not a good basis for trying to convince a buyer about the asking price for the business.

 

Other valuation techniques include the “rumor” method.  The “rumor” method is the price an owner chooses to use based on what he heard his friend sell his business.  Rather than a friend, it could have been a competitor two counties over or something they read in the local paper.  Once again, not a good method to use to convince a buyer on the asking price for the business.

 

Business valuations can be simple and straightforward or technical and complicated.  If the business is 100% owned by one person, has been in the same location with roughly the same number of employees for the last three years and the business has been operated the same way, then a valuation would be fairly easy to do if all financial records such as profit and loss, tax returns and balance sheets are up to date.

 

The above can be complicated if the business only has one or two customers.  If your business has existed for 54 years but has been supplying nuts and bolts you manufacture to General Motors and they are your only customer, how willing do you think a new buyer would be to take over the business.

 

Consider another example.  If the business is 40% owned by a father that retired 6 months ago and now his son wishes to sell his 40% interest with the remaining 20% owned by a long term employee that is also going to retire in 12 months, how easy do you think it would be to value this business?

 

The bottom line is that the permutations are endless.  But as we suggested at the start of this article, getting a business valuation is the right starting point.  Inevitably the market will determine the final price paid.  But don’t forget, the price is only the start of the journey; it’s the final terms of the offer that determine the value offered for the business.  Price and value are not synonymous.  The business may have a price of $1,000,000 but the value could be a totally different figure.  You’ve heard the expression – Beauty is in the eye of the beholder.  Value is from the same family, that is, value is in the eye of the Beholder.

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Avoid These Business Sale Myths

October 9, 2009

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.

Myth 1 – I Can Sell It Myself

Many owners believe they’re qualified to sell their business without professional assistance. Many owners are entrepreneurs and the key salesperson for the company. But selling a business is not like selling a product or service.

If you’re looking to sell on your own, confidentiality is lost. If word of a potential sale gets out, there are definite risks of losing clients, employees and favorable credit terms.

Do you really have the time to run your business and compile marketing materials, advertise, screen buyers, give tours and facilitate due diligence?

When you’re looking to sell you want to put even greater emphasis on running your business, boosting your sales and not taking on new challenges.

Myth 2 – I’ll Sell When I’m Ready

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.

Myth 3 – I Know What it is Worth

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.” Still others utilize industry multiples.

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.

Myth 4 – It’s Like Selling a House

Preparing to sell your house may take a few weeks, then you want to get the word out to everyone that the house is on the market. Once you get a satisfactory offer, you sign on the dotted line, turn over the keys and move on.

Selling a company is much more complex. 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.

Sound sale strategies will bring you the optimum price the market will bear. Go to market with realistic expectations by getting a professional valuation and using a professional business broker or intermediary.

 

If you have a question about selling or buying your business, give Andrew a call today at (916) 570 2674.

 

 

This article is reprinted as a courtesy of the International Business Brokers Association® (IBBA.) IBBA is the largest international, non-profit association operating exclusively for the benefit of people and firms engaged in the various aspects of a business brokerage and mergers and acquisitions. IBBA® has 1,950 members worldwide, with corporate headquarters in Chicago, Illinois.

Buying or Selling a Business during tough times

October 2, 2009

With negative economic news grabbing the headlines in the United States, business owners may think it’s not a good time to sell their company. But fortunately for owners looking to sell, that’s not necessarily true. 

Business sales are still taking place with sellers capturing attractive prices and favorable terms, when the deal is structured properly. 

Look at the buyer’s credibility – Of course, you want to find the best buyer possible. Whether it’s an individual, another company or a Private Equity Group, look for a potential buyer with business acumen, significant assets to pledge as collateral or a committed fund, as well as demonstrated success.

With a proven, credible buyer at the negotiating table, lenders are more likely to support the transaction.

 

Expect some seller financing – Oftentimes during a tight economy sellers must share the risks with the buyer and the lender in order to achieve the highest value.

In many instances the value of a successful business is greater than the fixed assets. In today’s tight lending environment, a seller can still get a strong value for the business, but the seller may need to finance more of the purchase price than before. Regardless of the capital structure or finance considerations, professionally crafted and creative deal structure is the key during a difficult economy.

Typically, seller financing has been somewhere between five percent and 15 percent. With the current lending climate, seller financing may approach 15 percent to 25 percent amortized over 10 years with a balloon payment between three years and five years.

After the buyer has proven themselves in the business and shown that the debt payments will be made, the lender will generally refinance the seller’s note. As a result, the seller receives full payment within three years to five years and the lender gets to loan more funds to a demonstrated lower-risk borrower.

While the economy has put a crunch on available financing, it has not had a dramatic impact on the number of potential buyers. With the right structure, deals are still getting done across the U.S.

If you have a question about selling or buying your business, give Andrew a call today at (916) 570 2674. 

 

 

This article is reprinted as a courtesy of the International Business Brokers Association® (IBBA.) IBBA is the largest international, non-profit association operating exclusively for the benefit of people and firms engaged in the various aspects of a business brokerage and mergers and acquisitions. IBBA® has 1,950 members worldwide, with corporate headquarters in Chicago, Illinois.

How to think about selling your business

September 25, 2009

The question of whether to sell your business is a difficult one. It is, no doubt, the biggest financial transaction you’ll ever make. Yet every successful business owner must face it eventually.

 There are several things to consider when selling your business:

  • When is the right time to sell? It’s important to pay attention to what’s going on within your company and industry. For a successful sale, you and your business must be ready. Your business should be properly managed and you should be able to demonstrate your company’s financial capability. If you want to sell your business by a certain date, allow sufficient time as selling a business is a complicated process that takes time.

 

  • Potential buyers. This may include competition, customers, vendors, suppliers, long-term employees or perhaps you have family members who wish to take over the business. Most often it is someone from outside of your circle of influence. A good intermediary can perform a proper search and will assist you in determining who may be the best acquirer.

 

  • Maintain records.
    You want all of your hard work to pay off in the sale, so be sure you have current, detailed records that provide an auditable assessment of the company’s financial position, and future projections.

 

  • Determine your business’ value. A business’ value is determined by a compilation of factors such as the company’s sales, earnings, performance, market outlook, personnel, net book value and fair market replacement value of equivalent operating assets. But it can also be influenced by intangible assets like the company’s image, reputation and goodwill.

 

  • Seek professional help. Regardless of your background, you should still seek professional advice. There will be many financial, legal and tax issues that will need to be resolved before you can sell your business. This will allow you to continue working on normal day to day business operations to keep your business moving forward.

IBBA business brokers or intermediaries are skilled in the process of selling a business. They are most often paid by a seller for their services. The most important factor is to have an experienced team of advisors during the sale process. This team should include a business broker/intermediary, accountant, and lawyer who have experience in the deal process.

Always remember that selling a business is usually a one time event. Preparation is a key to a successful sale. Be sure you understand the process involved.

If you have a question about selling or buying your business, give Andrew a call today at (916) 570 2674.

 

This article is reprinted as a courtesy of the International Business Brokers Association® (IBBA.) IBBA is the largest international, non-profit association operating exclusively for the benefit of people and firms engaged in the various aspects of a business brokerage and mergers and acquisitions. IBBA® has 1,950 members worldwide, with corporate headquarters in Chicago, Illinois.

5 things to consider if selling your business

September 18, 2009

Selling a business has many moving parts and as a result is very complex. Here are 5 suggestions that may make the task easier.

1. Get a professional third party valuation

This may sound obvious but naturally the seller wants as much money for the business as possible and the buyer wants to pay as little as possible. The place to meet is probably the “Warren Buffet place” with apologies to Warren Buffet. He’s on record as saying or something close to it – I would sooner pay too much for a good company than get a great deal on a company that won’t be around much longer.

2. Hire a qualified professional that you trust

Selling a business is not a quick or normally straightforward process. Each business has its own unique characteristics and is part of the dynamic global, regional and local economy as well as the specific industry it is in. Because of the complexities, ensure you have a qualified professional on your team that you trust and have complete confidence in. Apart from trust, other important components to look for include the professional qualifications from the International Business Brokers Association (IBBA) such as the CBI or Certified Business Intermediary or the state business brokers association (if one exists.) Some states require a real estate license – ensure your professional has any necessary license.

3. Make sure the business is sellable

So many owners plan on selling their business. As soon as it is on the market, they that stop doing the hard work that got the business to where it is now. Some even go on vacation. It normally takes about 6 ½ months to sell a business; if it sells. Make sure you continue advertising to your customer base, keep the employees motivated, continuing to check your customers are happy, pay your bills on time and most importantly of all, continuing to keep your landlord happy. The number one reason that a business won’t transfer from the seller to the buyer is that there is a dispute between the landlord and the seller and/or buyer. If you need a vacation, take it before putting the business on the market. Once it’s sold and you have trained the buyer, then it’s time for that trip of a lifetime.

4. List the business for sale at or near the business valuation

If you’ve owned the business for many years or recently spent a lot of money fixing a problem, it’s not uncommon for sellers to want to ask as higher price as possible so they can earn back some of that money. Buyers have a large number of businesses to choose from. Because most businesses look similar or they are not emotionally attached to the business, they have little problem in walking away. A good business for sale is fairly priced and has good potential. A buyer is looking for potential. Too many sellers want to be paid for potential but that’s the reason why the buyer is buying the business and is only willing to pay a fair price. The buyer is the one that will do all the work to take advantage of the potential; not have to pay the seller for it when they buy it.

5. Don’t forget the Golden Rule

The Golden Rule is – put yourself in the shoes of the other party. If you’re talking to your buyer, try to understand what’s important to them. If you are discussing your lease with your landlord, work out what’s important to them. And so it goes. Lenders, business brokers, franchisors (if applicable) attorneys, accountants and others all have a role to play. Even family members. Selling a business is not an easy event at the best of times. It’s even more difficult in a tough economy, if finance is tight, if key players have health issues and many other variables. Hence the value in hiring a professional you trust so to help guide you and keep all the moving parts lined up and managed.

 

If you would like more information about selling your business, visit my website; http://www.Andrew-Rogerson.com and order a copy of my book Successfully Sell Your Business: Expert Advice from a Business Broker.

Recasting financial statements

September 18, 2009

As a business owner, and part of the baby boomer generation, you’ve seen your share of ups and downs in the business world. 

If you are considering the sale of your business there are a growing number of brokers and mergers and acquisition specialists available to offer professional assistance to help you determine the value of your business and how the market might respond. 

Most businesses track their financial performance by using balance sheets, profit and loss statements and tax returns. These reports are beneficial in determining the value of a business. In most instances it’s the cash flow that prospective buyers need to identify to better understand the health of a business. They must also understand how the money is being spent and the available opportunities to generate positive cash flow in the future. 

The process of recasting financial statements is essential in determining the value of a business when the owner’s intentions are to sell. Recasting requires extensive investigation to ensure all relevant and appropriate adjustments are correctly reported. This is one of many services provided by a business broker or mergers and acquisition specialist. They will examine your financials along with the historical performance of the business, and endeavor to identify keys to future performance and market opportunities. 

The recasting process identifies items such as excessive and discretionary expenses and nonrecurring revenues and expenses. Recasting provides an economic view of the company, and allows meaningful comparisons with other investment opportunities. However, the owner benefits (salary, commissions, perks, incentives, personal loans and discretionary expenses) are considered and added back into the value of the company so a future buyer can adequately assess the business, its cash flow and future earning capacity.

A great deal goes into the process of determining value and selling a business. Recasting the financial statements of a business provides an indication of the business value and helps an owner with accurate expectations. A broker or mergers and acquisition specialist will help you understand the financial statements and help you move forward toward the completion of the business sale.

 

If you have a question about selling or buying your business, give Andrew a call today at (916) 570 2674.

 

 

This article is reprinted as a courtesy of the International Business Brokers Association® (IBBA.) IBBA is the largest international, non-profit association operating exclusively for the benefit of people and firms engaged in the various aspects of a business brokerage and mergers and acquisitions. IBBA® has 1,950 members worldwide, with corporate headquarters in Chicago, Illinois.

Business deals still take place, despite economic uncertainty

September 11, 2009

The current economic climate continues to hinder some business sales, but even with a challenging environment, businesses are changing hands. Regardless of the economy many aging boomers are looking to retire, while younger boomers are interested in buying and becoming their own bosses. 

This is the time when business savvy people don’t take cover but actually dig in. While some business owners are hiding from the possibly negative and money draining effects of a struggling economy, there are those who continue to look to buy and are finding that deals can still be done. 

Many business owners are concerned with the future and already have plans to sell in the next few years. They may be even more motivated to start the sale process now since businesses that are in the market are not selling as fast as in recent years. Buyers are discovering that business opportunities do exist, and that regardless of the state of the economy, deals are being done, they may simply require some creativity.

With credit markets as they are, banks are utilizing tighter lending and underwriting requirements for business acquisitions. Buyers and sellers must develop creative deal-structuring strategies that make transactions happen and provide future success. Seller financing helps with the capital structure, and has almost become a requirement by lenders in the current environment. Seller participation assures a prospective buyer and lender that the seller believes in the value and sustainability of the business.

Also, to remain competitive, many businesses could treat the down turn of the economy as a time to lay the foundations for future growth and the sale of the business when the economy rebounds. This may include a more global approach. Some regions of the world with advanced economies have escaped the effects of the credit crunch and those looking to create future successes may be able to capitalize on these global opportunities.

While there’s much doom and gloom associated with the current economy, opportunities do exist for those interested in buying or selling a business. For business owners, or would-be owners, it’s important to work with a qualified business transaction professional, like a Certified Business Intermediary (CBI) or Mergers & Acquisitions Master Intermediary (M&AMI). They can provide the proper guidance on developing deal strategy.

 

If you have a question about selling or buying your business, give Andrew a call today at (916) 570 2674.

 

 

This article is reprinted as a courtesy of the International Business Brokers Association® (IBBA.) IBBA is the largest international, non-profit association operating exclusively for the benefit of people and firms engaged in the various aspects of a business brokerage and mergers and acquisitions. IBBA® has 1,950 members worldwide, with corporate headquarters in Chicago, Illinois.

8 tips to consider when selling your business

September 7, 2009

Are you trying to sell your business, and quickly?  Check out these tips as they may help you achieve your goal.  

  1. Have a reasonable listing price.
  2. Be prepared to negotiate.
  3. Have a folder of information readily available for a qualified buyer.
  4. Run the business as usual.
  5. Make sure the business presents well; give it a “spit and polish.”
  6. Get a current snapshot of the business financials and keep them up-to-date.
  7. Put together a current list of Fixtures, Furniture, and Equipment (FF&E).
  8. Consider counting all inventories so the value is known.  This helps the buyer understand the final purchase price and reduces one of the many areas of negotiating a deal.

If you are motivated to sell your business quickly, be careful how you handle each buyer inquiry.  If you disclose too much information too quickly it may result in a lower offer from the buyer.  Additionally, the buyer may sense your urgency, also contributing to a lower offer or in some cases, frightening the buyer away as they may be concerned something is being hidden.

According to the California Association of Business Brokers, it takes about 7 ½ months to sell a business; if it sells.  Once you receive a written offer from the buyer and start the negotiation process, it will take anywhere from 6 to 8 weeks to close escrow if inventory is included in the sale.  It may take longer if licenses such as alcohol, contractors and other specialties are required.

There are many complexities to selling a business.  Using the services of a qualified business broker can protect you and your business and achieve your goal of selling your business in the shortest time possible for the highest purchase price.

If you would like more information about selling your business, visit my website; http://www.Andrew-Rogerson.com and order a copy of my book Successfully Sell Your Business: Expert Advice from a Business Broker.

If you have additional suggestions or experiences, please make them in the comments sectiion.

Don’t forget to consider Seller financing

September 4, 2009

As baby boomers begin to hit retirement age, many who are business owners are ready to sell. It’s created a market that has many businesses for sale. 

At the same time, concerns about the economy had made it tough to get financing for many potential deals. Seller financing is one option that could be the solution to get many deals done.

Seller financing involves a seller helping to finance the sale of the business by taking back a second note on the business. It differs from a traditional Small Business Administration (SBA) loan because the seller essentially extends credit to the buyer against the purchase price of the business. However, seller financing is misunderstood by many, even though it may be the best way to sell a business during a stagnant economy.

 The most common option for seller financing involves secured notes, but other options also exist, including: unsecured notes, assumption of the seller’s guaranteed credit, assumption of capital leases, a real estate lease, earnouts, notes on capital equipment and more.

 There are a number of benefits for business owners who are considering seller financing:

  • Faster sale – Seller financing provide an attractive option for buyers which means that sellers can sell their business fast and at a higher price.
  • Flexibility – Seller financing enables the seller to create a payment schedule, interest rates and loan period that fit their personal needs.
  • Tax breaks – Taking a note for part of the business purchase price may provide a tax break for the seller. The seller can defer some of the tax due on the sale of the business until full payment is received, which could be several years down the road.
  • Protections – Asking the new owner to keep the seller up to date with information like monthly profit and loss statements, workforce numbers, order backlog, inventory levels or other items with the monthly payment can be in the sale contract. The additional information allows the seller to keep track of the business and step in to offer advice or help if any problems are detected.

 Working with a qualified business transaction professional, like a Certified Business Broker (CBI) or Mergers & Acquisitions Master Intermediary (M&AMI) is also recommended. Certified brokers and intermediaries can provide the guidance you’re looking for when considering seller financing or other financing options. They will help potential buyers and sellers develop a deal that is fair to both parties in the acquisition process.

 

If you have a question about selling or buying your business, give Andrew a call today at (916) 570 2674.

 

 

  

 This article is reprinted as a courtesy of the International Business Brokers Association® (IBBA.) IBBA is the largest international, non-profit association operating exclusively for the benefit of people and firms engaged in the various aspects of a business brokerage and mergers and acquisitions. IBBA® has 1,950 members worldwide, with corporate headquarters in Chicago, Illinois.

Starting a business…let’s start with you

September 2, 2009

A lot of new business owners like to move quickly. They work through their decision to move into business ownership, do a little research, decide how much money they have, how much they can borrow and then start doing “it”…whatever “it” means for them and their business.

There’s no question that research and understanding your finances are important. Going into business requires money and what goes on around it. However, if you want to borrow money to help fund your new business you are going to need at least 4 things. If you can’t be bothered getting these together you will not be taken seriously by sellers, landlords, business brokers, lenders or other related parties. Or worse still, you’ll be taken seriously, asked for these documents and when they found not to be in order, your dream will be shattered.

These four things are your resume, your credit score, your credit report and your personal financial statement.

Each of these is important for the following reasons. For lenders to let you borrow money they want to see your resume so they can see you have the skills to manage the money they lend you. If you’ve spent the last 10 years of your career in the IT industry and now want to borrow money to buy a preschool, then you may not be taken too seriously. Build a strong resume so it highlights your management skills and be prepared to tweak your resume to support each loan application.

Second, if your credit score is 650 or less, you will struggle to get a loan. That may sound blunt but it’s the truth. The main purpose a bank is in business is to make money. They make money by giving loans to people who can pay them back. A low credit score is one of the tools a bank uses to decide whether you are worth the risk and therefore if you will pay back the loan, with interest. Yes, this is very simplistic but your credit score is very important.

Third, before you apply for a loan, get a copy of your credit report to make sure it’s accurate and there are no errors on it. There are a few reasons for this. Credit reports are notorious for errors. Imagine your frustration to have a great credit score, spend weeks building and executing your business plan, building relationships with suppliers, signing a lease on the perfect location for your person and a major vendor asks for a copy of your credit report to complete their paperwork and they find a bad comment on your credit report and they decline your request! All because there was an error on your credit report that should not have been there in the first place. Bottom line; let’s get this taken care of now so you have time to get things in order.

The final item is to build a personal financial statement. This document may be required by vendors, banks, landlords or other parties that you are planning on buying a business from. If you have this information prepared and ready to go it is one less task to worry about and having it prepared shows you are serious with what you want to do.

Starting a business is exciting, stressful, exhilarating, tiring, stimulating and fun to name a few things. A great business has strong foundations. To build strong foundations always look first at your responsibility and what you do so the rest will take care of itself when you get to it.

If you would like some free documents to help plan your move into business ownership, please visit my website, www.Andrew-Rogerson.com. Once the home page loads, choose the “Sample Documents” option from the menu on the left hand side and help yourself to 21 documents including business plans, break even analysis, profit and loss projectors, balance sheets, loan amortization calculators and more.