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Valuing Your Business

These approaches, described below, are the: 1) Asset Approach, 2) Income Approach, and 3) Market Approach.

Asset Approach

The Asset Approach is generally considered to yield the minimum benchmark of value for an operating enterprise.  The most common methods within this approach are Net Asset Value and Liquidation Value.  Net Asset Value represents net equity of the business after assets and liabilities have been adjusted to their fair market values.  The Liquidation Value of the business represents the present value of the estimated net proceeds from liquidating the Company's assets and paying off its liabilities.

 

Income Approach

The Income Approach serves to estimate value by considering the income (benefits) generated by the asset over a period of time.  This approach is based on the fundamental valuation principle that the value of a business is equal to the present worth of the future benefits of ownership.  The term income does not necessarily refer to income in the accounting sense but to future benefits accruing to the owner.  

The most common methods under this approach are Capitalization of Earnings and Discounted Future Earnings.  Under the Capitalization of Earnings method, normalized historic earnings are capitalized at a rate that reflects the risk inherent in the expected future growth in those earnings.  The Discounted Future Earnings method discounts projected future earnings back to present value at a rate that reflects the risk inherent in the projected earnings.  

Additional methods under the Income Approach are Capitalization of Excess Earnings and Multiple of Discretionary Earnings.  Commonly referred to as the “formula method,” the Capitalization of Excess Earnings method determines the value of tangible and intangible assets separately and combines these component values for an indication of total entity value.  Under the Multiple of Discretionary Earnings method, the entity is valued based on a multiple of “discretionary earnings,” i.e., earnings available to the owner who is also a manager.  Both of these methods are normally used to value small businesses and professional practices.

 

Market Approach

The Market Approach compares the subject company to the prices of similar companies operating in the same industry.  Comparable companies can be privately owned or publicly traded where the valuation multiples are determined from the purchase/sale price for the company.  A common problem for privately owned businesses is a lack of publicly available comparable data.  Comparable companies can also be publicly traded where the valuation multiples are derived from the trading price for the public companies stock as of the date of the valuation.

Small business owners, wary of economic uncertainty, more realistic about their sales valuations

Manufacturing Companies Top List of Small Businesses Bought in Q2 2017, According to New National Business Survey

 

Small business owners, wary of economic uncertainty, more realistic about their sales valuations

 

(Los Angeles), August 28, 2017 – Continuing a four-year trend, manufacturing companies are the most sought-after business acquisitions valued in the $1 million - $5 million range, according to the Q2 2017 Market Pulse Report published by the International Business Brokers Association (IBBA), M&A Source, and the Pepperdine Private Capital Market Project.

 

The new quarterly survey shows high interest in the U.S. manufacturing sector among buyers of businesses in the lower middle market, despite national headlines about outsourcing of jobs and companies moving overseas.

 

“For years, people have talked about manufacturing being dead and jobs going overseas, but there is a resurgence in the U.S.,” said (Robert Dean, Certified Business Broker, Banner Business Sales Inc. and member of IBBA/CABB). “In the lower middle market, manufacturing is very much a sought-after industry, as it’s been the number one or two market leader for the last several years. We see it every day: manufacturing businesses are busy, profitable, and in-demand.”

 

Sales of business service companies dominated the $500,000 - $1 million segment, while among “Main Street” businesses (under $500,000), restaurants and personal services businesses were the companies most commonly purchased.

 

The Market Pulse Report also found that although 72 percent of the participants received multiple interests/offers on their most recent closing for their clients, the business marketplace is becoming more of a buyers’ market, most notably for businesses valued under $2 million, compared to the same quarter last year. This means that buyers have an advantage in price negotiation and sellers are realizing they have to be more realistic with their financial expectations.

 

“Political and economic uncertainty is causing the shift to a buyers’ market,” said John

Howe, M&AMI, Director, Business Transition Strategies, M&A Source Chair. “Sellers are becoming anxious about closing their deals and as a result, they are becoming more lenient about the sale price and the terms and conditions.”

 

Retirement still the top reason for selling


A desire for retirement continues to be the top reason for selling a business. In the $1 million – $2 million sector, advisors reported retirement and burnout were equal motivators to sell, marking this as the rare quarter in which retirement wasn’t the absolute leading factor across every sector.

 

“We know from experience that a proactive exit strategy yields much higher business values than exiting in burnout mode,” said Lou Vescio, CBI, M&AMI, principal, Coastal Business Intermediaries, Inc., IBBA chair. “Unfortunately, most buyers only really care about the last year or so of business performance, not what you did when you were full of energy and going strong. Waiting until you’re burned out is a common mistake, and business owners can lose anywhere from 20 to 50 percent of value by waiting too long.”

 

“Corporate exodus” behind many small business purchases


The survey found buyers in the Main Street market are most often motivated by a desire to leave corporate America and become active full-time in a business.  Sixty percent of those purchasing businesses at <$500,000 and 52 percent of buyers of $500,000 - $1 million reported that they were “buying a job.” Conversely, buyers in the lower middle market are more often interested in expanding an existing business through a horizontal or vertical add-on.

 

About the Market Pulse Report

The Market Pulse Report compares conditions for businesses being sold on Main Street (values of $0 - $2 million) to those being sold in the Lower Middle Market (values of $2 million – $50 million). The Q2 2017 survey was completed by 293 business brokers and M&A advisors representing 38 states.

About International Business Brokers Association (IBBA) and the M&A Source

Founded in 1983, IBBA is the largest non-profit association specifically formed to meet the needs of people and firms engaged in various aspects of business brokerage and mergers and acquisitions. The IBBA is a trade association of business brokers providing education, conferences, professional designations, and networking opportunities. For more information about IBBA, visit the website at www.ibba.org or follow the IBBA on Facebook, Twitter, and LinkedIn.


Founded in 1991, The M&A Source promotes professional development of merger and acquisition professionals so that they may better serve their clients’ needs, and maximize public awareness of professional intermediary services available for middle market merger and acquisition transactions. For more information about the M&A Source visit www.masource.org, or follow The M&A Source on Facebook, LinkedIn, and Twitter.

 

About the Pepperdine Graziadio School of Business and Management

Anchored in the core values of integrity and innovation, the Pepperdine Graziadio School of Business and Management challenges individuals to think boldly and drive meaningful change that positively impacts their organizations and communities. With an entrepreneurial spirit, the Graziadio School advances experiential learning in small classes that deepen connections and stimulate critical thinking. Through our wide continuum of MBA, MS and Executive degree programs offered across six California campuses, Graziadio faculty inspire full time students and working professionals to realize their greatest potential as values-centered, “best for the world” leaders. Follow Pepperdine Graziadio on Facebook, Twitter at @GraziadioSchool, Instagram, and LinkedIn.

 

Contacts:        

Robert Dean, CBB, CBI                                 

Certified Business Broker

President, Banner Business Sales Inc.                           

Member IBBA /CABB                                    

310-793-6757                                               

Robert@BannerBusinessSales.com            

www.bannerbusinesssales.com  


Scott M. Bushkie, CBI, M&AMI

IBBA Marketing Chair

Principal, Cornerstone Business Services, Inc.  

(920) 436-9890

sbushkie@cornerstone-business.com

www.cornerstone-business.com

Terms for Business Sales & Acquisitions

Accrual Basis Accounting

A method of accounting wherein income and expenses are recognized, with the statements, when the business first acquires the right to receive the income, or the obligation to pay the expense. Regular corporations are required to sue the accrual bases by the IRS. (Also see Cash Basis Accounting.)

Acknowledgement

A declaration by someone that something is true. A declaration before an official that one has executed a particular legal document. 

Aging Accounts Receivable

An analysis of the accounts receivable, usually alphabetized, as of the date of the balance sheet you are using, wherein each account receivable is shown in columnar form as either current, over 30 days, over 60 days, over 90 days, or over 120 days delinquent. Normally comments should be make regarding the accounts recent payment pattern and other indications regarding the probability of collection. 

Amortization

The charging to expense of the cost of an intangible asset. This is normally done over a period of years. (see Depreciation.)

Assets

Property that a business owns, including cash and receivables, inventory, etc. Assets are any possessions that have value in an exchange.

Balance Sheet

A statement of the financial status of the business on a certain date.

Blue Sky

That portion of a "claimed" value or requested price that cannot be supported, or generally show to exist, through the application of established valuation methodology.

Book Value

Mostly used as an accounting term, book value is the difference between the total assets and total liabilities. 

Broker

An intermediary that serves as a go-between for the buyer or seller.

Business Appraisal/Valuation

The process of estimating the value of a business. There are 3 approaches to valuing a company, Market Data, Income and Asset, and there are 8 methods within those 3 approaches including: Direct Market Data, M&A, Guideline Public Company, Capitalization of Benefits, Multiple of Discretionary Earnings, Discounted Future Benefits, Net Asset Accumulation and Excess Earnings method. 

Capital Expenditures

Or "capex" are the amounts spent for tangible assets that will be used for more than one year in the operations of a business. Capital expenditures can be thought of as the amounts spent to acquire or improve a company's fixed assets. Some examples include the purchase of machinery, equipment, furniture, building improvements, computer information systems, and leasehold improvements.

Capitalization Rate

Any divisor, usually expressed as a percentage, used to convert income to value.

Cash Basis Accounting

A method of accounting wherein income and expenses are recognized, within the statements, when the business receives the income, or pays the expense. (Also see Accrual Basis Accounting.)

Cash Equivalents

Investment assets that can be quickly converted into cash.

Cash Flow Statement

A financial statement that displays the sources and uses of cash. The Cash Flow Statement groups together funds in all activities whether they are in "Operations", "Financing", or "Investments".

Closing

The act of transferring ownership of a property from seller to buyer in accordance with a sales contract. 

Confidentiality Agreement

A pact that forbids buyers, sellers, and their agents in a given business deal from disclosing information about the transaction to others. 

Covenant

A promise in an agreement or contract agreeing to performance or nonperformance of certain acts, or requiring or preventing certain acts or uses. 

Depreciation/Amortization

In an economic sense, as used in recasting of statements, a loss in value of a fixed asset as a result of wear and tear or obsolescence, which cannot be corrected by normal repairs. In accountants' financial statements, an expense item that permits the original cost to be written off against income over the assets' cost recovery period, as dictated from time to time by the IRS or GAAP. (In the context of the recasting of financial statements, the amount of accumulated depreciation could be much greater or much less than the amount shown on the accountants' statement. 

Considered a non-cash charge (sometimes called a book charge) as this expense is allowed in excess of the interest expense, if the acquisition of the asset was financed. The amount of depreciation taken as a non-cash charge in any given accounting period is almost always based upon number of years approved by the IRS for cost recovery. 

Discount Rate

A rate of return used to convert a monetary gain, payable or receivable in the future, into present value. 

Discretionary Earnings

Adjusted earnings before taxes, interest income or expense, non-operating and nonrecurring expenses, depreciation and other non-cash charges and prior to deducting an owner's/officer's compensation. 

Doing Business As (DBA) 

DBA stands for “Doing Business As,” which is a company name, also commonly called a “Fictitious business name.” When a sole proprietor operates a company using any name except his or her own given name, then the DBA or fictitious business name registration establishes the legal ownership to satisfy banks, local authorities, and customers.

Dividends 

Money distributed to the owners of a business as profits.

Earnings

The gross operation revenues of the business less expenses and other deductions applicable to the type of earnings your are defining:

Net Income - Earnings after the payment of all expenses including income taxes.

EBT - Earnings Before Taxes. Earnings of the business prior to income taxes paid.

EBIT - Earnings Before Interest and Taxes. Earnings of the business prior to Interest expense or income + corporate income Taxes paid. This definition recognizes interest as a cost of capital, and not as an operating expense; or the recasting is being done on a debt-free basis. 

EBITDA - Normalized Earnings Before Interest, Taxes, Depreciation and Amortization. Earnings of the business prior to Adjusted Net Income + Interest expense or income + corporate Taxes paid + all Depreciation and Amortization Expenses. 

DE/SDE/SDCF - Adjusted earnings before taxes, interest income or expense, non-operating and non-recurring income/expenses, depreciation and other non-cash charges and prior to deducting an owner's/officer's compensation. Seller's Discretionary Earnings and Seller's Discretionary Cash Flow are the same as Discretionary Earnings. 

FIFO

First In First Out. An accounting method of valuing inventory, based on the assumption that the "first" unit of an item of inventory purchased (the oldest) is the first unit sold out of inventory. In pricing the inventory under this valuation method, the ending inventory is the aggregate of the cost of the newest, most recently purchased units of each item. 

Fiscal Year 

Standard accounting practice allows the accounting year to begin in any month. Fiscal years are numbered according to the year in which they end. For example, a fiscal year ending in March of 1992 is Fiscal 1992, even though most of the year takes place in 1991.

Fixtures

A Fixture is an item of property which is physically attached to or closely associated with land as to be treated as part of the real estate, including, without limitation, physically attached items not easily removable without damage to the property, items specifically adapted to the property, and items customarily treated as fixtures. 

Going Concern Value

It is the value placed on a business for being in business and providing a service to it's customers.

Goodwill

That intangible asset that arises as a result of a name, reputation, customer patronage, location, products and similar factors that have not been separately identified and/or valued but which generate economic benefits. For some, goodwill is synonymous with Blue-sky. This view results from a lack of understanding of the difference. (Also see Blue-sky.)

Gross Margin Percent 

Gross margin divided by sales, displayed as a percentage. Acceptable levels depend on the nature of the business.

Gross Profit

That portion of next sales that remains after the subtraction of the Cost of Goods Sold. 

Income

See Earning

Income Statement

A financial statement used to summarize the financial activities of a business during the period of time specified within the statement. AKA Income/Expense Statement, Profit & Loss, P&L. The Income Statement and Balance Sheet are normally issued together, as companion documents, each supplementing the other. 

Indemnification

A promise by one party to another to restore a loss by payment of money, replacement, or repair. It is used typically to cover the result of a warranty or representation that is or was not true

Inventory

Goods in stock, either finished goods or materials to be used to manufacture goods.

Inventory Turnover

Total cost of sales divided by inventory. Usually calculated using the average inventory over an accounting period, not an ending-inventory value.

Investment Value

The value to a specific buyer or acquirer as opposed to a buyer in general.

Letter Of Intent

An agreement between a buyer and a seller used in connection with the acquisition of a company. The letter of intent describes the basic terms and conditions of the transaction between the two parties, including price, due diligence periods, exclusivity, and the basic conditions to closing the deal. Customarily presented before a definitive purchase agreement is entered into, the letter of intent provides a road map for the parties involved in the transaction. 

Liability

A liability is a company's financial debt or obligations that arise during the course of its business operations. Businesses sort their liabilities into two categories: current and long-term. Current liabilities are debts payable within one year, while long-term liabilities are debts payable over a longer period.

LIFO

List In First Out. An accounting method of valuing inventory, based on the assumption that the "last", most recent, unit of an item of inventory purchased is the first unit sod out of inventory.

Liquidation Value

The value if the business is closed and the assets are liquidated.

Market Share

Total sales of an organization divided by the sales of the market they serve.

Net Cash Flow

Net Cash income plus all non-cash charges (depreciation, amortization and depletion), less amounts needed for capital expenditures, plus/minus net change in working capital, plus/minus change in debt. (This would be net cash flow for equity, invested capital net cash flow would exclude the net change in debt and adjust net income to include interest expense, net of tax.)

Net Present Value (NPV)  

The method of discounting future streams of income using an expected rate of return to evaluate the current value of expected earnings. It calculates future value in today’s dollars. NPV may be used to determine the current value of a business being offered for sale or capitalized.

Operating Expenses 

Expenses incurred in conducting normal business operations. Operating expenses may include wages, salaries, administrative and research and development costs, but excludes interest, depreciation, and taxes.

Original Equipment Manufacturer (OEM)

The process that is facilitated through licensing or other financial arrangements where the initial producer of a product or service enters into an agreement to allow another entity to include, remanufacture, or label products or services under their own name and sell through their distribution channels. It typically results in a “higher volume, lower margin” relationship for the original producer, and offers access to a broader range of products and services the buyer can offer their consumers at more attractive costs.

Procuring Cause

A legal term that means the cause resulting in accomplishing a goal. Used in real estate or business brokering, to determine whether a broker is entitled to a commission. 

Pro Forma Statements

Financial statements that project the results of future business operations. Examples include a pro forma balance sheet, a pro forma income statement, and a pro forma cash flow statement.

Representation

An action or speech on behalf of a person, group, business house, state, or the like by an agent, deputy, or representative.

SIC Code

The Standard Industrial Classification SIC is a system for classifying industries by a four-digit code. Established in the United States in 1937, it is used by government agencies to classify industry areas.

Stipulation

A special demand for something as a condition of an agreement. 

Warranty

An expressed or implied statement that a situation or thing is as it appears to be or is represented to be. 





Early possession is the taking over of a business before the close of escrow. I've had several business transactions where the buyer wanted to take over the business before the close of escrow. Is this a good idea? NO. For whatever reason the seller and buyer have for the early possession, it's simply not a good idea.

Some of the reasons why the parties want to have an early possession can range from the seller "done with the business" and moving on, which happened in one of my transactions, to the buyer seeing that the seller is not running the business as it should and the buyer wanting to stop the deterioration of the business. 

What if the buyer does take over and then realizes that running a business is not as easy as it sounds. Long hours, problem employees, irate customers, old equipment that starts to have problems, vendors and suppliers don't cooperate, the buyer sees items that were not disclosed, etc. At this point, the buyer may decide to stop the sale and create a lot of problems for both sides. 

Another problem for early possession is the possibility of the buyer not running the business properly which may result in detrimental changes that could permanently affect both the closing of the sale and the business itself. 

I always discourage the seller from allowing the buyer to take early possession. And if they both absolutely want to make the change, they should have an agreement written up and have it reviewed by their attorney. 


Asset Sale vs. Stock Sale

Deciding whether to structure a business sale as an asset sale or a stock sale is complicated because the parties involved benefit from opposing structures. Generally, buyers prefer asset sales, whereas sellers prefer stock sales. An asset sale is the purchase of individual assets and liabilities, whereas a stock sale is the purchase of the owner's shares of a corporation. While there are many considerations when negotiating the type of transaction, tax implications and potential liabilities are the primary concerns.


Asset Sale 

In an asset sale, the seller retains possession of the legal entity and the buyer purchases individual assets of the company, such as equipment, fixtures, leaseholds, licenses, goodwill, trade secrets, trade names, telephone numbers, and inventory. Asset sales generally do not include cash and the seller typically retains the long-term debt obligations. This is commonly referred to as a cash-free, debt-free transaction. Normalized net working capital is also typically included in a sale. Net working capital often includes accounts receivable, inventory, prepaid expenses, accounts payable, and accrued expenses. 


Stock Sale

With a stock sale, the buyer purchases the selling shareholders' stock directly thereby obtaining ownership in the seller's legal entity. The actual assets and liabilities acquired in a stock sale tend to be similar to that of an assets sale. Assets and liabilities not desired by the buyer will be distributed or paid off prior to the sale. Unlike an asset sale, stock sales do not require numerous separate conveyances of each individual asset because the title of each asset lies within the corporation.  

With a stock sale, buyers will be accepting more risk by purchasing the company's stock, including all contingent risk that may be unknown or undisclosed. These potential liabilities can be mitigated in the stock purchase agreement through representations and warranties and indemnifications. 


Pratt's Stats 

Based on an analysis of marketplace transactions from the Pratt's Stats database, approximately 30% of all transactions were stock sales. However, this figure varies significantly by company size, with larger transactions having a greater likelihood of being stock sales.




CBI Designation:

A Certified Business Intermediary (CBI) is an experienced business broker who is committed to the highest level of professional development the industry has to offer and has ethical values aligned with the IBBA standards of professionalism. A CBI has the ability to objectively guide clients through the intricacies of the entire marketing and negotiation process of a business sale, resulting in successful transactions and satisfied clients.

A CBI offers the most experienced professional representation available during the process of selling or buying a business. Along with having undergone a specialized initial program of detailed training, a CBI is required to earn continuing education credits to maintain the credential.

 

CBB Designation:

The CABB Certified Business Broker (CBB) is a privileged designation that identifies an experienced and dedicated Business Broker. The title distinguishes its holder as a seasoned, professional who has a solid educational background, proven accomplishments in completing business transactions, and an active members in the California Association of Business Brokers (CABB).

Contact Certified Business Broker Robert Dean to Sell your Business.

 

Business Broker

From Wikipedia

A business broker is a person or firm who/which acts as an intermediary between sellers and buyers of small businesses.

Business brokers, also called business transfer agents, or intermediaries, assist buyers and sellers of privately held small business in the buying and selling process. They typically estimate the value of the business; advertise it for sale with or without disclosing its identity; handle the initial potential buyer interviews, discussions, and negotiations with prospective buyers; facilitate the progress of the due diligence investigation and generally assist with the business sale.


Agency relationships in business ownership transactions involve the representation by a business broker (on behalf of a brokerage company) of the selling principal, whether that person is a buyer or a seller. The principal broker (and his/her agents) then become the agent/s of the principal, who is the broker’s client. The other party in the transaction, who does not have an agency relationship with the broker, is the broker's customer.

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Agency relationships with clients and customers

Traditionally, the broker provides a conventional full-service, commission-based brokerage relationship under a signed agreement with a seller or "buyer representation" agreement with a buyer. In most states this creates, under common law, an agency relationship with fiduciary obligations. Some states also have statutes which define and control the nature of the representation and have specific business broker licensing requirements.

Agency relationships in business ownership transactions involve the representation by a business broker (on behalf of a brokerage company) of the selling principal, whether that person is a buyer or a seller. The principal broker (and his/her agents) then become the agent/s of the principal, who is the broker’s client. The other party in the transaction, who does not have an agency relationship with the broker, is the broker's customer.

 Dual or limited Agency

Dual agency occurs when the same brokerage represents both the seller and the buyer under written agreements. Individual state laws vary and interpret dual agency rather differently.

  • If state law allows for the same agent to represents both the buyer and the seller in a single transaction, the brokerage/agent is typically considered to be a Dual Agent. Special laws/rules often apply to dual agents, especially in negotiating price.
  • In some states of the USA (notably Maryland[1]), Dual Agency can be practiced in situations where the same brokerage (but not agent) represent both the buyer and the seller. If one agent from the brokerage has a home listed and another agent from that brokerage has a buyer-brokerage agreement with a buyer who wishes to buy the listed property, Dual Agency occurs by allowing each agent to be designated as “intra-company” agent. Only the principal broker himself/herself is the Dual Agent.
  • Some states do allow a broker and one agent to represent both sides of the transaction as dual agents. In those situations, conflict of interest is more likely to occur.

Types of services that a broker can provide

Broker services vary widely depending on the practice and skill set of the broker. The most common services provided by a broker to a client are:

  • Assist client in establishing a MPSP Value - Most Probable Selling Price Valuation; the techniques used by individual brokers can vary greatly in this process
  • Develop a comprehensive Information Memorandum on the company; normally a 15-30 page document outlining the business for potential buyers
  • Conduct buyer searches
  • Exposure - Marketing the business to prospective buyers
  • Screen buyers for ability to complete a purchase
  • Coordinate negotiations and provide deal structuring advice
  • Provide overall deal management to guide the client through the entire process
  • Help maintain confidentiality of the sale
  • Hourly Consulting for a fee, based on the client's needs

Perhaps one of the biggest services provided by brokers is the ability to allow owners to stay focused on running their business during the sale process which can be take on average 6 months to 12 monthes to complete.

General

The sellers and buyers themselves are the principals in the sale, and business brokers (and the principal broker's agents) are their agents as defined in the law. However, although a business broker commonly fills out the offer to purchase form, agents are typically not given power of attorney to sign the offer to purchase or the closing documents; the principals sign these documents. The respective business brokers may include their brokerages on the contract as the agents for each principal.

The use of a business broker is not a requirement for the sale or conveyance of a business or for obtaining a Small business or SBA loan from a lender. However, once a broker is used, A special escrow attorney sometimes called a settlement attorney (or party handling closing) will ensure that all parties involved be paid. Lenders typically have Special requirements for a business related or SBA loan.

The market served by business brokers generally involves the sale of businesses with transaction values less than $10 M. Larger privately held companies are classified in the Middle Market and will employ firms that specialize in Mergers and Acquisitions, or M&A. However, business brokers do participate in mergers and acquisitions activities when it involves a transaction between two or more smaller companies. Business Brokers and M&A firms do overlap activities in the extremes of their market. These extremes are called the Transitional Market, or TransMarket.

Business brokers and sellers

Services provided to seller as client

Upon signing a listing contract with the seller wishing to sell the business, the brokerage attempts to earn a commission by finding a buyer for the sellers' business for highest possible price on the best terms for the seller. To help accomplish this goal of finding buyers, a business brokerage commonly does the following:

  • Ensures Confidentiality--Brokers have established systems in place to protect the confidentiality of a business.
  • Appraisals--Most business owners have no idea what their business is worth. Certified Business Brokers are trained in business valuation and can help business owners understand the true value of all their hard work and sacrifice.
  • Market Knowledge--Brokers make their living selling businesses. They are in the market on a daily basis conversing with Buyers. A local business broker understands the local market as well as what a business is worth.
  • Saves time and stress
  • Listing the business for sale to the public, often on a Multiple Listing Service, in addition to any other methods.
  • Based on the law in several states, providing the seller with a business condition disclosure form, and other forms which may be needed.
  • Preparing necessary papers describing the business for advertising, pamphlets, tours, etc.
  • Advertising the business. Advertising is often the biggest outside expense in listing a business.
  • Being a contact person available to answer any questions about the business and to schedule showing appointments
  • Ensuring buyers are prescreened so that they are financially qualified to buy the business; the more highly financially qualified the buyer is, the more likely the closing will succeed.
  • Negotiating price on behalf of the sellers. The seller's agent acts as a fiduciary for the seller. By not being emotionally tied to the transaction, Business Brokers are in a position to more effectively negotiate on a Seller's behalf. This may involve preparing a standard offer to purchase contract by filling in the blanks in the contract form.
  • Negotiating facility lease assignment or transfer, negotiating with creditors, assisting Buyer in obtaining financing.
  • In some cases, holding an earnest payment in escrow from the buyer(s) until the closing. In many states, the closing is the meeting between the buyer and seller where the business ownership is transferred and the businesses name is conveyed.

Business brokers attract prospective buyers in a variety of ways, including listing limited details of available businesses on their websites and advertising in business newspapers and magazines. Brokers also directly approach prospective buyers and sellers to gauge interest.

 Brokerage Compensation

There are three forms of Brokers compensation; hourly, retainer, and success fee (commission upon a closing). A Broker may use any one, or combination of these when providing services. The most common form of compensation is a success fee commission where the payment of a commission to the brokerage is contingent upon finding a satisfactory buyer for the business for sale, the successful negotiation of a purchase contract between a satisfactory buyer and seller, or the settlement of the transaction and the exchange of money between buyer and seller. Just as major investment banks normally charge a retainer for services, more business brokers have started to embrace this practice as well. The retainer helps covers the upfront costs incurred by the broker to perform services and shows a commitment on the part of the client (seller or buyer) that they are serious. Certain types of merger and acquisitions transactions involve securities and may require that an intermediary be securities licensed in order to be compensated.

In North America success fee commissions range from 5% to 12%. Usually, the smaller the transaction, the larger the commission. "Main Street" businesses, those with revenues between $100,000 and $1,000,000 can expect commissions to average between 10% - 12%. Commissions are determined between the client (seller or buyer) and their broker and are normally paid at closing.

The standard commission is likely to be lower in the United Kingdom (see Lehman scale). Commissions are negotiable between seller and broker. The commission could also be paid as flat fee or some combination of flat fee and percentage, particularly in the case of lower-priced businesses, businesses in the multi-million dollar price, or other unusual business assets. The details are determined by the listing contract.

Out of the commission received from the seller, the broker will typically pay any expenses incurred to do the work of trying to sell the listed businesses, such as advertisements, etc.

All compensation to a broker paid by a third party must be disclosed to all parties.

Why use a business broker?

The process of buying or selling a business requires dedication and the attention of a professional with the knowledge of the complete flow of a business transaction, as well as a team in place to accomplish every aspect of the transfer.  Marketing and facilitating a business transfer is a full-time job!  You deserve someone who will work as hard as you do.  A qualified broker will save business owners and prospective buyers money by helping them avoid costly mistakes, effectively marketing the appeal of the business, and maximizing exposure to serious, qualified buyers--all with complete confidentiality.

If you are interested in selling your business and don’t know the answer to any of the questions below, you could benefit from the assistance of a professional broker (and you are not alone!)

  • How do you reach qualified buyers, including possibly competitors, without disclosing your intentions to sell?
  • How do you evaluate your business objectively to ensure you receive top dollar for your investment and avoid costly negotiating tactics?
  • How do you prepare and provide the information a prospective buyer will require to interest him in pursuing your business in favor of other options?
  • How do you arrive at the best price and terms, including the intangible and goodwill values of your business?
  • How do you maximize your favorable exposure to potential offers while minimizing your potentially damaging public exposure to customers, competitors, employees, and suppliers?
  • How do you market your business in all of the appropriate markets, databases, and media efficiently, effectively and confidentially?
  • How do you screen and pre-qualify buyers, determine their motivations, managerial capabilities, and financial strength?
  • How do you effectively sell your business, diverting significant time, effort and resources to that process, while continuing to manage your ongoing business productively?

Business owners have focused their entire lives on growing and developing their businesses and seldom know how to answer all of the questions above. That is where a professional BBN Affiliate Broker can come in. The sale of your business demands a professional, just as running your business has demanded your professional attention.  BBN Affiliate Brokers have the expertise, tools, and professional team to market and sell your business successfully on a national basis. The objective is to protect your business investment and maximize your net after tax profit on the sale.  It is to your advantage and in connection, your broker’s as well, to obtain the best possible price that a reasonable buyer will pay.  BBN Affiliate Brokers strive to maintain high ethical standards and communicate in an open and honest manner in all of business relationships.

What affects the selling price?

Several factors come into play and can affect the sales price.  One of the most critical is the “terms” or the amount of down payment and the amount financed.  Over eighty percent of all businesses sold above $100,000 are sold with one-third or less down and the owner financing the balance.  Asking for one-half down will reduce the price by approximately twenty percent.  Asking for cash will reduce the price to about forty to sixty percent of the amount attainable with one-third down.   

Down payment or the “terms” is a key factor, because a buyer is trying to buy as much business as possible for the money available for down payment.  So, when a seller asks for $200,000 down on a $400,000 value business, buyers prefer to continue looking until a $600,000 value business is found where the owner will accept $200,000 down and finance the balance. The seller who asks for all cash or a large down payment is not going to succeed in obtaining the full fair market value of their business, because buyers know they can buy three times as much business for the same investment. In a nutshell, high percentage down payments cause buyers to discount offers.  

A second critical factor is the quality of the information provided to a prospective buyer.  The value of the assets and cash flow generated by the business must be provable and verifiable.  A professional business broker will be able to assist the business owner in arriving at these values.

The third most important factor that effects the sales price of a business is whether there is competition among prospective buyers for the business. Competition creates higher selling prices, as we all know from basic economic principles.  When a business owner asks for more than the fair market value for their business or does not offer reasonable terms, there will be few, if any, buyers interested in acquiring the business. On the other hand, when a business is priced realistically and with proper terms, multiple buyers are likely to pursue acquiring the business. A buyer who knows he has other buyers competing for the business will be motivated to offer the price being asked to ensure he does not lose the business to another buyer's better offer.

 

What do I need to do to help sell my business?

The first thing you need to do is offer the business at a realistic price and with reasonable terms.  You need to provide as much information as is possible to the broker so a professional marketing package, including a business profile, can be prepared on your company.  The quality of the business profile will greatly enhance the “saleability” of a business. A package prepared by a BBN Affiliate Broker will contain the financial, operational and historical information about the business.  Informed buyers make better offers. Other things a seller can do are:

  • Continue to run your business in a normal manner.
  • Keep the business clean and organized (on paper and in person), so potential buyers will like what they see.
  • Liquidate or set aside obsolete inventory and unneeded equipment before you place the business on the market.
  • Notify your broker of any material changes in your business.
  • Forward monthly financial statements to the broker as soon as they are completed. 
  • This will keep your marketing package current. Do not meet with potential buyers without your broker being present. 
  • Avoid direct negotiations.
  • All offers and counter-offers should be in writing and should be presented by the broker. 

If you're thinking about selling your business, or would like to know what your business is worth, contact Certified Business Broker Robert Dean for a free Business Evaluation. Phone: 310-793-6757. Email: info@robertdean.biz.

Are Sellers Expecting Too Much?

One of the main reasons why a business won't sell is because the owner places too high of a value on the company. The seller does not take into account what the buyer is thinking. A buyer wants to know how long will it take to get a return on his investment, what are the risks involved, and what exactly he is buying. Does it make sense for the buyer to purchase the business? Is the buyer paying all cash or will he need a loan. If the buyer is obtaining a loan, they will need to analyze the cash flow and see if they are able to service the debt, and how long it will take to recoup their investment. Does a buyer want to wait 7 years to get a return on his investment? In most cases, No.

Obtaining a new lease from the landlord can also hinder a business sale. Not getting the terms that makes sense for a buyer such as length of time so a buyer can recoup his or her investment, or a significant increase in the rent which will diminish the discretionary earnings of the seller.

A downward trend of revenues will affect the profits and cash flow. A buyer will wait and see if the trend continues and if so, will most likely purchase the business at a significantly lower price or not at all.

Another very important aspect of a business sale are the financial records. Inaccurate or incomplete records can be disastrous to the seller and the business sale. It is crucial to have accurate records to show the buyer exactly how the business is operated.

Does a significant amount of your company’s revenue come from one or two clients? Do you have solid contracts with these clients? If not, and if they decide to not do business with a new owner, the company’s value is greatly depreciated.

 Can your business operate on its own? Buyers place a higher value on companies that can run themselves. An owner should delegate more of his or her responsibility to employees so the company relies less on the owner.

Is the business in a declining or obsolete industry such as video rentals, or is big competition driving out small mom and pop stores such as Staples has done to small stationary stores.

Does the Seller and Buyer get along. I had one of my business owners tell me that he doesn’t care about the buyer and he "spits in his eye". Deals have been killed due to seller/buyer dislike for each other.

These are just some of the reasons why businesses don’t sell. And according to BizBuySell’s 2014 Insight Report, they have about 30,000 businesses at any one time and there was 1,650 to 1,890 transactions closed per quarter over the last five quarters. This means that only about 4 or 5 percent of the businesses listed on the site are being sold in any one quarter.


If you have any questions about selling your business, please Contact Certified Business Broker Robert Dean for a Free Business Consultation. Banner Business Sales, Inc. Phone: 310-709-1985. Email: info@bannerbusinesssales.com Website: BannerBusinessSales.com

Make sure your business records are organized for a buyer.

Not only is it important to keep good Books & Records to run a successful business, but it’s also very important to have accurate Books & Records to sell a business.

I have dealt with business owners with both immaculate books & records and horribly inaccurate books & records. If your looking to acquire a business, which business would you rather buy? It is very difficult to properly value a business with poor books & records and it will ultimately hurt the value of the company.

If you want to get top dollar in selling your business, then make sure you have a solid grasp on your company’s business financials. Make sure you have accurate Profit & Loss Statements and Tax Returns for a minimum 3 years. A buyer will also want to examine the Balance Sheet, General Ledger and Bank Statements, etc..

  1. If you don’t have a Profit & Loss, this is where I would start. This will show a buyer exactly how your company's cash flow affects the business. Keep it Simple. Show your Gross Revenue, Cost of Goods Sold, Gross Profit, Company Expenses, and Net Profit.
  2. The Balance Sheet is a snapshot of your business at an exact period of time. This will show a buyer the company's Current Assets, Accounts Payable, Accounts Receivables, Current Liabilities, etc. This will greatly help if the business handles a lot of inventory and uses a lot of equipment.
  3. Tax Returns will needed and will also be sued to secure SBA or Bank financing.
  4. Your General Ledger and Bank Statements should corroborate your cash flow of the business. This is one of the primary items a buyer will look at during Due Diligence.

The more confident the buyer is in the owner's financial information, the more likely they will purchase the business closer to the asking price.

So if you're thinking about selling your business, make sure that the all of your financial documents are in order to help make the sales transaction a smooth and prosperous one.

If you have any questions about selling your business, please contact Certified Business Broker Robert Dean, CBB at Banner Business Sales, Inc. Phone: 310-709-1985. Email: info@bannerbusinesssales.com Website: BannerBusinessSales.com

Valuing a Business using SDE and EBITDA

 SDE & EBITDA 


(Sellers) Discretionary Earnings (DE)

Discretionary Earnings are the adjusted earnings before taxes, interest income or expense, non-operating and non recurring income/expenses, depreciation and other non-cash charges, and prior to deducting an owner's/officer's compensation. 


EBITDA

EBITDA stands for earnings before interest, taxes, depreciation and amortization. EBITDA is essentially net income with interest, taxes, depreciation and amortization added back to it. EBITDA can be used to analyze and compare profitability between companies and industries because it eliminates the effects of financing and accounting decisions. 


DE vs. EBITDA
The difference between DE and EBITDA is the amount of fair market compensation that would be paid to the working owner or manager of the business. 


The Equation

DE = EBITDA + one normal owner

EBITDA = DE - one normal owner


Read more: EBITDA - Earnings Before Interest, Taxes, Depreciation and Amortization http://www.investopedia.com/terms/e/ebitda.asp#ixzz4lcPdgvnU 


If you have any questions about selling your business, please contact Certified Business Broker Robert Dean, CBB at Banner Business Sales, Inc. Phone: 310-709-1985. Email: info@bannerbusinesssales.com Website: BannerBusinessSales.com


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