What Would Your Business Sell For?

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Photo Credit: Victor1558 via Compfight cc

There is the old anecdote about the immigrant who opened his own business in the United States. Like many small business owners, he had his own bookkeeping system. He kept his accounts payable in a cigar box on the left side of his cash register, his daily receipts – cash and credit card receipts – in the cash register, and his invoices and paid bills in a cigar box on the right side of his cash register.

When his youngest son graduated as a CPA, he was appalled by his father’s primitive bookkeeping system. “I don’t know how you can run a business that way,” his son said. “How do you know what your profits are?”

“Well, son,” the father replied, “when I came to this country, I had nothing but the clothes I was wearing. Today, your brother is a doctor, your sister is a lawyer, and you are an accountant. Your mother and I have a nice car, a city house and a place at the beach. We have a good business and everything is paid for. Add that all together, subtract the clothes, and there’s your profit.”

A commonly accepted method to price a small business is to use Seller’s Discretionary Earnings (SDE). The International Business Brokers Association (IBBA) defines SDE as follows:

Discretionary Earnings – The earnings of a business enterprise prior to the following items:

  • income taxes

  • nonrecurring income and expenses

  • non-operating income and expenses

  • depreciation and amortization

  • interest expense or income

  • owner’s total compensation for one owner/operator, after adjusting the total compensation of all other owners to market value

Here are some terms as defined by the IBBA:

  • Owner’s salary – The salary or wages paid to the owner, including related payroll tax burden.

  • Owner’s total compensation – Total of owner’s salary and perquisites.

  • Perquisites – Expenses incurred at the discretion of the owner which are unnecessary to the continued operation of the business.

Developing a Multiplier

Once the SDE has been calculated, a multiplier has to be developed. The following (just as a guideline) should be rated from 0 to 5 with 5 being the highest. For example, if the business is a highly desirable business in the current market, “desirability” would be rated a 4 or 5. If the business is in an industry that is quickly declining or nearly obsolete, “industry” would be given a 0 or 1 rating.

Age: Number of years the seller has owned and operated the business.

  • Terms: Is the seller willing to offer terms?  For example, will the seller accept 40 percent as a down payment with the seller carrying back 60 percent at terms the business can afford while still providing a living for the buyer?
  • Competition: Consider the local market.
  • Risk: Is the business itself risky?
  • Growth trend of the business: Is it up or down?
  • Location/Facilities
  • Desirability: How popular is the business in the current market?
  • Industry: Is the industry itself declining or growing?
  • Type of business: Is the business type easily duplicated?

The average business sells for about 1.8 to 2.5. Obviously, if the SDE is solid and the multiple is above average, the price will be higher. Keep in mind that the price outlined includes all of the assets including fixtures and equipment, goodwill, etc. It does not include real estate or saleable inventory. The price determined above assumes that the business will be delivered to the buyer free and clear of any debt.

Veteran Wisdom

When all else fails, the words of a veteran business broker will work.

Asking Price is what the seller wants.

Selling Price is what the seller gets.

Fair Market Value is the highest price the buyer is willing to pay and the lowest price the seller is willing to accept.

Sellers should keep in mind that the actual price of a small business is about 80 percent of the seller’s asking price.

 

How Long Does It Take to Sell a Business?

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Recent studies indicate that it now takes, on average, about eight to ten months to sell a small business. This figure seems to increase yearly. Why does it take so long to sell a business?

Price and terms are the biggest reasons!  It is very important not to overprice the business at the beginning of the sales process. A business will also sell more quickly if there is a reasonable down payment with the seller carrying the balance.  Having all of the necessary information right from the beginning can also greatly reduce the time period.  Finally, being prepared for the information a buyer may want to review or having the answers available for the questions a buyer may want answered is another key.

Here is the basic information a prospective acquirer will want to review and a seller should have prepared to help facilitate a quicker sale:

Copies of the financials for the past three years.

A copy of the lease and any assignments of the lease from previous sales.

A list of the fixtures and equipment that will be included in the sale. Note: If something is not included in the sale, it is best to remove it from the premises prior to the sale or at least have a list that specifies which items are not included.

A copy of the franchise agreement, if applicable, or any agreements with suppliers or vendors.

Copies of any other documentation pertaining to the business.

Supporting documents for patents, copyrights, trademarks, etc.

Sales brochures, press releases, advertisements, menus or other sales materials.

In addition, here are some key questions that buyers may likely ask.  A prepared seller should have ready answers and information to support those answers.

Is the seller willing to train a new owner at no charge?

Are there any zoning or local restrictions that would impact the business?

Is there any pending litigation?

Are any license issues involved?

Are there any federal or state requirements, or environmental OSHA issues that could affect the business?

What about the employee situation? Are there key employees?

Are there any copyrights, secret recipes, mailing lists, etc?

What about major suppliers or vendors?

A prepared seller is a willing seller, and having the answers to the above items can significantly reduce the time it takes to sell a business.

Using the services of a professional business broker can also greatly reduce the time period.  Business brokers are knowledgeable about the current market, they know how to market a business, and they can advise a seller on price and terms.  They can also recommend professional advisors if a seller doesn’t have them already.  Using advisors who are transaction experienced can also shorten the time it takes to close the sale.

When to Create an Exit Strategy

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Photo Credit: DoodleDeMoon via Compfight cc

There is the old saying that the time to develop an exit strategy is the day you open for business. Sounds good, but it’s not very realistic. Further, it also isn’t very optimistic. On the day you open for business, thoughts about how you get out of it aren’t pleasant, or helpful, thoughts. However, as you get the business to a place where you have a bit of extra time to plan, you will find that the things you need to do to improve your business are some of the very things you will need to work on to plan an exit strategy.

You can’t predict misfortune, but you can plan for it. One never knows when an accident or illness will force one to sell. When the drive to your business becomes filled with dread, maybe it’s time to consider selling. The following ideas will improve your business, even if you’re not currently considering selling. Dealing with these areas will also supply the information a buyer will most likely be looking at when the time does come to sell.

Buyers want cash flow.

This, at least on the surface, is the thing a potential buyer will want to look at.

Appearances are important.

You may think everything about the business looks fine, but the two letters on the neon sign that don’t work indicate to a possible buyer that the seller may have lost interest in the business, causing them to also wonder what else doesn’t work or has been neglected.

There is probably more value than you think.

Business owners often don’t look at things that do create real value such as: customer lists, secret recipes, specialized computer systems, programs, customer loyalty programs, etc.

Eliminate the surprises.

Make sure the lease is transferable and that your landlord is willing to cooperate.  Resolve that issue with town hall.  Resolve the problem with that angry customer. Minor problems and issues will often raise their ugly heads during sensitive times, spooking a possible buyer. So, the time to resolve them is before going to market.

Five Kinds of Buyers

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Photo Credit: CarbonNYC via Compfight cc

Buyers are generally categorized as belonging to one of the following groups although, in reality, most buyers fit into more than one.

The Individual Buyer

This is typically an individual with substantial financial resources, and with the type of background or experience necessary for leading a particular operation.

The individual buyer usually seeks a business that is financially healthy, indicating a sound return on the investment of both money and time.

The Strategic Buyer

This buyer is almost always a company with a specific goal in mind — entry into new markets, increasing market share, gaining new technology, or eliminating some element of competition.

The Synergistic Buyer

The synergistic category of buyer, like the strategic type, is usually a company. Synergy means that the joining of the two companies will produce more, or be worth more, than just the sum of their parts.

The Industry Buyer

Sometimes known as “the buyer of last resort,” this type is often a competitor or a highly similar operation. This buyer already knows the industry well, and therefore does not want to pay for the expertise and knowledge of the seller.

The Financial Buyer

Most in evidence of all the buyer types, financial buyers are influenced by a demonstrated return on investment, coupled with their ability to get financing on as large a portion of the purchase price as possible.

Almost all the purchasers of the smaller businesses fall into the individual buyer category. But most buyers, as mentioned above actually fit into more than just one category.

© Copyright 2013 Business Brokerage Press, Inc.

Why Deals Don’t Close

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Photo Credit: faungg via Compfight cc

Sellers

  • Don’t have a valid reason for selling.
  • Are testing the waters to check the market and the price. (They are similar to the buyer who is “just shopping.”)
  • Are completely unrealistic about the price and the market for their business.
  • Are not honest about their business or their situation. The reason they want to sell is that the business is not viable, it has environmental problems or some other serious issues that the seller has not revealed, or new competition is entering the market.
  • Don’t disclose that there is more than one owner and they are not all in agreement.
  • Have not checked with their outside advisors about possible financial, tax or legal implications of selling their business.
  • Are unprepared to accept seller financing or now unwilling to accept it.

Buyers

  • Don’t have a valid reason to buy a business, or the reason is not strong enough to overcome the fear.
  • Have unrealistic expectations regarding price, the business buying process, and/or small business in general.
  • Aren’t willing (many of them) to do the work necessary to own and operate a small business.
  • Are influenced by a spouse (or someone else) who is opposed to the purchase of a business.