How long does it take to sell my business?
Why should I go to a business broker?
What can business brokers do - and, what can't they do?
What can I do to help sell my business?
What happens when there is a buyer for my business?
Why is seller financing so important to the sale of my business?
VALUING A BUSINESS
How long does it take to sell my business?
It generally takes, on average, between five to eight months to sell most businesses. Keep in mind that an average is just that. Some businesses will take longer to sell, while others will sell in a shorter period of time. The sooner you have all the information needed to begin the marketing process, the shorter the time period should be. It is also important that the business be priced properly right from the start. Some sellers, operating under the premise that they can always come down in price, overprice their business. This theory often "backfires," because buyers often will refuse to look at an overpriced business. It has been shown that the amount of the down payment may be the key ingredient to a quick sale. The lower the down payment, generally 40 percent of the asking price or less, the shorter the time to a successful sale. A reasonable down payment also tells a potential buyer that the seller has confidence in the business's ability to make the payments.
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Why should I go to a business broker?
A professional business broker can be helpful in many ways. They can provide you with a selection of different and, in many cases, unique businesses, including many that you would not be able to find on your own. Approximately 90 percent of those who buy businesses end up with something completely different from the business that they first inquired about. Business brokers can offer you a wide variety of businesses to look at and consider. Business brokers are also an excellent source of information about small business and the business buying process. They are familiar with the market and can advise you about trends, pricing and what is happening locally. Your business broker will handle all of the details of the business sale and will do everything possible to guide you in the right direction, including, if necessary, consulting other professionals who may be able to assist you. Your local professional business broker is the best person to talk to about your business needs and requirements.
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What can business brokers do - and, what can't they do?
Business brokers are the professionals who will facilitate the successful sale of your business. It is important that you understand just what a professional business broker can do -- as well as what they can't. They can help you decide how to price your business and how to structure the sale so it makes sense for everyone -- you and the buyer. They can find the right buyer for your business, work with you and the buyer in negotiating and every other step of the way until the transaction is successfully closed. They can also help the buyer in all the details of the business buying process. A business broker is not, however, a magician who can sell an overpriced business. Most businesses are saleable if priced and structured properly. You should understand that only the marketplace can determine what a business will sell for. The amount of the down payment you are willing to accept, along with the terms of the seller financing, can greatly influence not only the ultimate selling price, but also the success of the sale itself.
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What can I do to help sell my business?
A buyer will want up-to-date financial information. If you use accountants, you can work with them on making current information available. If you are using an attorney, make sure they are familiar with the business closing process and the laws of your particular state. You might also ask if their schedule will allow them to participate in the closing on very short notice. If you and the buyer want to close the sale quickly, usually within a few weeks, unless there is an alcohol or other license involved that might delay things, you don't want to wait until the attorney can make the time to prepare the documents or attend the closing. Time is of the essence in any business sale transaction. The failure to close on schedule permits the buyer to reconsider or make changes in the original proposal.
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What happens when there is a buyer for my business?
When a buyer is sufficiently interested in your business, he or she will, or should, submit an offer in writing. This offer or proposal may have one or more contingencies. Usually, they concern a detailed review of your financial records and may also include a review of your lease arrangements, franchise agreement (if there is one), or other pertinent details of the business. You may accept the terms of the offer or you may make a counter-proposal. You should understand, however, that if you do not accept the buyer's proposal, the buyer can withdraw it at any time. At first review, you may not be pleased with a particular offer; however, it is important to look at it carefully. It may be lacking in some areas, but it might also have some pluses to seriously consider. There is an old adage that says, "The first offer is generally the best one the seller will receive." This does not mean that you should accept the first, or any offer -- just that all offers should be looked at carefully. When you and the buyer are in agreement, both of you should work to satisfy and remove the contingencies in the offer. It is important that you cooperate fully in this process. You don't want the buyer to think that you are hiding anything. The buyer may, at this point, bring in outside advisors to help them review the information. When all the conditions have been met, final papers will be drawn and signed. Once the closing has been completed, money will be distributed and the new owner will take possession of the business.
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Why is seller financing so important to the sale of my business?
Surveys have shown that a seller, who asks for all cash, receives on average only 70 percent of their asking price, while sellers who accept terms receive on average 86 percent of their asking price. That's a difference of 16 percent! In many cases, businesses that are listed for all cash just don't sell. With reasonable terms, however, the chances of selling increase dramatically and the time period from listing to sale greatly decreases. Most sellers are unaware of how much interest they can receive by financing the sale of their business. In some cases it can greatly increase the amount received. And, again, it tells the buyer that the seller has enough confidence that the business can, indeed, pay for itself.
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VALUING A BUSINESS
Although every business has it’s own unique set of circumstances, buyers typically evaluate potential acquisitions in a similar manner. Based upon our experience in the marketplace, the following are the major factors considered by prospective acquirers when determining a company’s worth:
Recast Earnings. With rare exception, a company’s recast pre-tax earnings influence valuation more than any other factor. Viewed in the simplest manner, buyers are looking to purchase a stream of income that will provide a desired return on investment and justify the purchase price. Consequently, most commonly accepted valuation methods primarily rely on multiples of earnings. It follows that the stronger the earnings the greater the value. All other factors remaining equal and given this reality, it is critical that a seller present the financial statements in a format that will maximize the earnings in the eyes of the acquirer. Most businesses are valued based on a formula derived from “Owner’s Discretionary Income”.
Hard Assets. Tangible assets have a positive influence on value. Generally the greater the asset value included as part of a transaction, the greater the overall company value. However, since earnings typically have a greater impact on valuation than assets, increases and decreases in asset values rarely have a dollar-for-dollar impact on company valuations. For example: assuming there is equipment valued at $300,000 included in a transaction, increasing the amount of equipment to $400,000 may slightly elevate the company’s value but considerably less than the $100,000 difference. Large sums of required capital assets may actually be viewed as a “liability” to certain buyers as they generally require larger future investment to replace or maintain these assets, diminishing future available cash flow.
Risk Factors. To clearly determine a company’s value, buyer must weigh the future opportunities against the perceived business and economic risk. Elements of the business that increase risk decrease the value of the business. Conversely, elements that decrease risk increase value. Examples of risk factors that influence valuation include: industry life cycle, industry stability, customer base concentrations or dependencies, supplier dependencies, product or service differentiation, strength and size of market, management quality and depth, employee dependencies, impending regulation, new technology and many others. Although each of these risks is unique, they all have one common trait – an ability to either reassure or cast doubt on the predictability of future cash flow. As a result, the better a business can control, offset or properly present these potential risks, the more “positive the impact” on valuation.
Acquirer Identity. A company can have a significantly greater value to one acquirer than another. Much of the perceived value derives from the company’s strategic fit with a potential buyer. Strategic value can be achieved through cost synergies (i.e. elimination of duplicate expenses and reduction in cost of goods) or sales and marketing of complimentary products and services that afford new markets and customers to each company. The key is to identify potential acquirers that should have the most to gain from a business combination.
Terms. Price and terms tend to have a negative correlation. For example, an all cash transaction will generally yield a lower price when compared to a transaction that includes owner financing. The better the terms offered to a buyer, the higher the price that can be paid to the seller. This primarily relates to cash flow, the cost and availability of outside debt capital and the risk associated with completely “cashing out” the business owner at closing. The key is to identify the right combination of price and terms that creates a “win-win” for both buyer and seller.
Transaction Structure. Will the transaction be an asset sale or a stock sale? Will the seller receive continuing perks and fringe benefits? Will the seller retain certain assets (i.e. receivables, cash, deposits, etc.) rather than include them as part of the transaction? Will the seller be willing to structure an earn-out for a portion of the transaction? These and many other alternative transaction allocations and structures will have a direct impact on tax implications and total yield to the seller.
Presentation and Packaging. When buyers evaluate a business opportunity, they expect the records and facts to be properly organized and documented. A professionally packaged business will greatly increase a buyer’s confidence and comfort level thereby increasing the likelihood of a successful sale. Most buyers enlist their CPA, lawyer or business partners to provide feedback. These educational presentation packages keep everyone on the “same page”. You have spent years establishing name recognition, market niche, vendor relationships, operation and production systems, management, personnel, distribution channels, customer loyalty, expansion opportunities, synergies and numerous other intangible business assets. This story needs to be properly presented to potential buyers. A professional Business Broker can present the best possible picture of the entire business thus maximizing the attractiveness and perceived value of the firm in the eyes of potential acquirers.
OWNER'S DISCRETIONARY INCOME CHECKLIST
The following is a checklist of possible items that make-up your “Owners Discretionary Income”. Some or all of these items may pertain to your business. Most Small to Medium sized Businesses are sold at a Multiple of this Compilation. Other Factors ( as above article ) are also taken into consideration, but everything begins here.
- REAL ESTATE OR LEASE VALUE
- PATENTS, TRADEMARKS, COPYWRIGHTS AND INTELLECTUAL PROPERTIES AND INDUSTRY POSITION.
- OWNER SALARIES INCLUDING TAXES
- CORPORATE PROFITS
- DEPRECIATION
- AMORTIZATION
- HEALTH INSURANCE
- PERSONAL AUTO INSURANCE
- ANY OTHER PERSONAL INSURANCE
- ANY PERSONAL VEHICLE CHARGES AND REPAIRS
- PERSONAL TRAVEL & ENTERTAINMENT CHARGES TO THE BUSINESS
- ANY PERSONAL SERVICES CHARGED TO THE BUSINESS
- PERSONAL LOAN PAYMENTS AND INTEREST
- PHONE AND PERSONAL COMMUNICATIONS CHARGED TO THE BUSINESS
- MISCELLANEOUS EXPENSES
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