One of the major problems in pricing businesses, especially small ones, is the record-keeping of the owner. Most owners are “chief cook and bottle-washer.” Maintaining the financial records is not necessarily high on his or her list. In many cases, the bills and receipts are tossed in an envelope and periodically dumped on a bookkeeper’s or accountant’s desk. From these documents, along with computer (or cash register) print-outs of sales, the accountant prepares tax returns, and, in some cases, monthly or quarterly income statements. The rub in all this is that the accountant can work with only what the seller provides. Small business owners are usually so busy running the day-to-day operations that they fail to spend the necessary time on the financial affairs of their business.
The sale of a business is usually “event driven.” In other words, there is generally a specific event that forces, or, at least, pushes an owner into selling. Very few business owners actually sit down to consider selling and all that it entails. The event occurs; the seller calls his local business broker and announces that he or she now needs to sell. They want to know what it will sell for. The business broker says that before a price can be suggested, he or she will need to see the financial records. The seller scurries to his accountant and says that he needs his current profit and loss statements and the last three years’ tax returns. The accountant promptly faints! When she wakes up, she tells the client that it will take a lot of time to go through the bag of receipts and bills.
When the financials are finally prepared or the tax returns given to the business broker, one thing is readily seen – the financial records or tax returns reveal that the business has not made much money over the years. After all, tax returns are not prepared to show a business in its best light. Nobody, including the small business owner, wants to pay any more taxes than he or she has to. The focus shifts now that the decision to sell has been made.
Business brokers are very good at recasting or normalizing the financial statements or tax returns. They add back such items as depreciation, owner benefits, etc., and arrive at the “real cash flow” of the business. This number is used to arrive at a recommended or suggested selling price. For anyone selling a business, using the services of a business broker professional can make the difference between a successful sale and “giving away the store.”
Wednesday, November 30, 2011
Monday, November 28, 2011
Is the Business Sustainable?
One of the important issues in valuing a company is the sustainability of sales and income. It is a major issue in the due diligence process. It is also one of the most difficult to assess since many of the factors are so subjective. To bring things into focus, here are some of the factors that should be considered in looking at the sustainability of sales and profits:
■proprietary products and/or services
■market share
■customer concentration/broad distribution
■quality of financial systems
■depth of management
■seasonality/cyclicality
■current appraisals on equipment & real estate
A few of the questions a buyer may be trying to answer are:
■Is the company’s market position weaker than purported?
■Is the competition weaker or stronger than represented?
■Is the market struggling or growing?
■How does the company “benchmark” against the competition?
The analysis of the above factors and questions are a necessary part of not only the valuation process, but also the areas that a prospective buyer would investigate.
■proprietary products and/or services
■market share
■customer concentration/broad distribution
■quality of financial systems
■depth of management
■seasonality/cyclicality
■current appraisals on equipment & real estate
A few of the questions a buyer may be trying to answer are:
■Is the company’s market position weaker than purported?
■Is the competition weaker or stronger than represented?
■Is the market struggling or growing?
■How does the company “benchmark” against the competition?
The analysis of the above factors and questions are a necessary part of not only the valuation process, but also the areas that a prospective buyer would investigate.
Wednesday, November 23, 2011
How Do Valuation Experts Look at Your Company?
Providing a business valuation is more than just analyzing financial statements and records. Although the process is complex, the first step is to gather the necessary information. Business owners can make this a lot easier by maintaining good records on an ongoing basis. Although audited statements are certainly preferable, most appraisers and business intermediaries are accustomed to working with the company’s own financial records. Company officials should understand that the people doing the valuation are not charged with verifying the figures but can only work with what is provided to them. Here are some of the areas that are assessed by those doing the valuation:
■The quality of earnings and the sustainability of the earnings come at the top of the list.
■The balance sheet can often show how well management is doing -- for example, by looking at inventory turns and whether there is excess inventory, etc.
■Many figures can be compared to industry data to see how well the company is performing compared to its peers.
■Part of the valuation process is to review the company’s past, present, and especially its future.
■The valuation process, if done correctly with management’s involvement, can show how well the company is performing with like businesses, and specifically how it can improve and add value.
■Professional business appraisers know how to properly recast the financial statement and then apply the proper method to arrive at an appropriate value.
■Business intermediaries, who do valuation work, are especially in tune with market values and conditions.
■Finally, value is not just based on the financial condition of the company. Such factors as those listed below all have a place in the valuation process. •Market share
•Products and or services—are they proprietary?
•Customer concentration and distribution geographically
•Management, their experience, their depth and their ages
•Intellectual property such as brand name, patents, etc.
•Management non-competes, employment agreements
•Dependence on a few customers, seasonality, etc.
A proper valuation, if done on a regular basis, can show any increase/decrease in value. A valuation should also be performed when considering selling.
■The quality of earnings and the sustainability of the earnings come at the top of the list.
■The balance sheet can often show how well management is doing -- for example, by looking at inventory turns and whether there is excess inventory, etc.
■Many figures can be compared to industry data to see how well the company is performing compared to its peers.
■Part of the valuation process is to review the company’s past, present, and especially its future.
■The valuation process, if done correctly with management’s involvement, can show how well the company is performing with like businesses, and specifically how it can improve and add value.
■Professional business appraisers know how to properly recast the financial statement and then apply the proper method to arrive at an appropriate value.
■Business intermediaries, who do valuation work, are especially in tune with market values and conditions.
■Finally, value is not just based on the financial condition of the company. Such factors as those listed below all have a place in the valuation process. •Market share
•Products and or services—are they proprietary?
•Customer concentration and distribution geographically
•Management, their experience, their depth and their ages
•Intellectual property such as brand name, patents, etc.
•Management non-competes, employment agreements
•Dependence on a few customers, seasonality, etc.
A proper valuation, if done on a regular basis, can show any increase/decrease in value. A valuation should also be performed when considering selling.
Monday, November 21, 2011
A Different Look at Valuing Your Company
Is there pricing elasticity?
What's proprietary?
What's the company's competitive advantage?
Status of employment agreements and non-competes?
Post-Acquisition:
Are there cost savings after purchase?
Are there significant capital expenditures pending?
Is there synergy with the seller?
Is it perceived the integration will go smoothly?
Are there substantial cross-selling possibilities?
Will the cultures blend?
The Financials: By training and education, many business appraisers emphasize the numbers. They will look at the past, current and future numbers. They will consider all the basic financial figures such as:
• growth rate
• return on investment
• gross profit percentage
• EBITDA percentage
• industry metrics
• debt to net worth
• book value
Fundamentals: Business appraisers should also consider the company’s history, its management, products, distribution, etc. The following should also be seriously considered: multi-products, different markets, wide distribution and the quality of management.
Value Drivers: These are important business elements that are most often ignored or completely overlooked by business appraisers. However, they are very important to a potential buyer.
• product differentiation
• defensible position
• technology
• dominant market share
• well-known brand(s)
• cost advantage
• proprietary customer
What's proprietary?
What's the company's competitive advantage?
Status of employment agreements and non-competes?
Post-Acquisition:
Are there cost savings after purchase?
Are there significant capital expenditures pending?
Is there synergy with the seller?
Is it perceived the integration will go smoothly?
Are there substantial cross-selling possibilities?
Will the cultures blend?
The Financials: By training and education, many business appraisers emphasize the numbers. They will look at the past, current and future numbers. They will consider all the basic financial figures such as:
• growth rate
• return on investment
• gross profit percentage
• EBITDA percentage
• industry metrics
• debt to net worth
• book value
Fundamentals: Business appraisers should also consider the company’s history, its management, products, distribution, etc. The following should also be seriously considered: multi-products, different markets, wide distribution and the quality of management.
Value Drivers: These are important business elements that are most often ignored or completely overlooked by business appraisers. However, they are very important to a potential buyer.
• product differentiation
• defensible position
• technology
• dominant market share
• well-known brand(s)
• cost advantage
• proprietary customer
Wednesday, November 16, 2011
Seller Financing -- How a Broker Can Help
Another important factor relating to the asking price is the amount of cash involved in the sale. There is an old saying that the higher the full-price, the lower the down payment - and vice-versa. The sale of almost any business involves some seller financing. The smaller the down payment, the higher likelihood of a quick sale. No seller wants to take back his or her business because the buyer wasn't successful. On the other hand, a buyer wants to make sure that the business will not only pay for itself, but also provide sufficient income for his or her family's needs.
What it all boils down to is that the seller wants the buyer to be successful and the buyer wants to buy a successful business. With the amount of capital required in today's market to buy a business, sellers should feel optimistic that they are dealing with successful buyers.
A Valuable Service
Screening and qualifying buyer prospects is perhaps the business broker's most valuable service. Business brokerage industry statistics indicate that over 90 percent of buyer prospects who call on business-for-sale ads are unqualified for some reason. The successful business broker survives by mastering qualifying and screening techniques!
Maintaining Confidentiality
Confidentiality is always a major concern. Sellers feel that maintaining confidentiality is important in safeguarding the current business. They don't want the word to leak out to customers, suppliers, competitors - and especially the employees. This is an area where a business broker professional can be especially helpful. They use non-specific descriptions, screen and qualify buyers and require buyers to sign confidentiality agreements before showing businesses or providing specific information.
However, even under the best of circumstances, rumors can fly. There are basically two ways sellers can muffle the business-for-sale problem. The first is to explain that over the years there have been people who have inquired about whether the business might be for sale. These inquiries are unavoidable and they do happen.
The other way is to handle the matter directly and to explain that you have been considering retiring and now may be the right time. The employees, especially the key ones, should be told prior to putting the business on the market so they don't hear the rumors second-hand. They should be told that they are very important to the business's success and that a new owner would most likely be happy to retain them. When the sale is complete, they can be offered a bonus for helping in the process. Sellers should do whatever it takes to keep the employees from deserting the ship and keep them on deck to maintain business as usual. Once employees have been dealt with openly and fairly, they will understand that discretion will help protect their future.
The Future of the Business
Sellers may feel that they have built the platform for the future growth of the business. It is only natural for them to want to share in any extraordinary profits in what they feel they have helped create. Sometimes, if the price is low enough and it allows a buyer to purchase the business, he or she may be willing to provide some type of earn-out or royalty based on any substantial increase in sales. The professional business broker can offer advice on how to make this work for everyone. However, everyone has to agree that no one can predict the future. As mentioned earlier, the buyer is hoping to buy the future, but is not willing to pay for it.
What Buyers Think
Many buyers think that the business they buy should be able to pay for itself. They are wary of sellers who demand all cash. Is the seller really saying that the business can't support any debt, or is he or she saying that the business isn't any good and I want my cash out of it now, just in case?
What it all boils down to is that the seller wants the buyer to be successful and the buyer wants to buy a successful business. With the amount of capital required in today's market to buy a business, sellers should feel optimistic that they are dealing with successful buyers.
A Valuable Service
Screening and qualifying buyer prospects is perhaps the business broker's most valuable service. Business brokerage industry statistics indicate that over 90 percent of buyer prospects who call on business-for-sale ads are unqualified for some reason. The successful business broker survives by mastering qualifying and screening techniques!
Maintaining Confidentiality
Confidentiality is always a major concern. Sellers feel that maintaining confidentiality is important in safeguarding the current business. They don't want the word to leak out to customers, suppliers, competitors - and especially the employees. This is an area where a business broker professional can be especially helpful. They use non-specific descriptions, screen and qualify buyers and require buyers to sign confidentiality agreements before showing businesses or providing specific information.
However, even under the best of circumstances, rumors can fly. There are basically two ways sellers can muffle the business-for-sale problem. The first is to explain that over the years there have been people who have inquired about whether the business might be for sale. These inquiries are unavoidable and they do happen.
The other way is to handle the matter directly and to explain that you have been considering retiring and now may be the right time. The employees, especially the key ones, should be told prior to putting the business on the market so they don't hear the rumors second-hand. They should be told that they are very important to the business's success and that a new owner would most likely be happy to retain them. When the sale is complete, they can be offered a bonus for helping in the process. Sellers should do whatever it takes to keep the employees from deserting the ship and keep them on deck to maintain business as usual. Once employees have been dealt with openly and fairly, they will understand that discretion will help protect their future.
The Future of the Business
Sellers may feel that they have built the platform for the future growth of the business. It is only natural for them to want to share in any extraordinary profits in what they feel they have helped create. Sometimes, if the price is low enough and it allows a buyer to purchase the business, he or she may be willing to provide some type of earn-out or royalty based on any substantial increase in sales. The professional business broker can offer advice on how to make this work for everyone. However, everyone has to agree that no one can predict the future. As mentioned earlier, the buyer is hoping to buy the future, but is not willing to pay for it.
What Buyers Think
Many buyers think that the business they buy should be able to pay for itself. They are wary of sellers who demand all cash. Is the seller really saying that the business can't support any debt, or is he or she saying that the business isn't any good and I want my cash out of it now, just in case?
Monday, November 14, 2011
Increasing the Value of Your Business
Considering selling your business? Just want to increase the value of your business? Here are some areas to look at that can fairly quickly increase profits, which are, after all, a main building block in creating value.
• PRICING: Are the prices of the products or services set too low? Owners too often continue with the same prices year after year without revisiting their pricing structure.
• CUSTOMER SERVICE: Despite all of the above Elevating the quality or amount of customer service may not only increase business and support the higher prices suggested above, but also encourage customers to pay more promptly, increasing cash flow.
• EXPENSES: Owners should review what they pay for inventory, supplies, utilities, insurance, technology and any other expenses. Are you getting the lowest price possible? Are you taking advantage of all available discounts, etc.? It may pay to check pricing from other suppliers and vendors. Every saving increase profits and subsequently profits.
• INVENTORY: In some cases inventory levels may be higher than necessary. Retail operations want their stores to look “busy,” but they don’t need a basement or warehouse full of inventory. In today’s fast-moving economy, inventory can be supplied almost on demand – in most cases. This should be balanced by still taking advantage of special pricing on certain items or stockpiling hard-to-get inventory.
• OUTSOURCING: Some services, especially in today’s environment of the self-employed, can be outsourced. While replacing workers is not pleasant, and should only be done if substantial savings can be realized, outsourcing is often worth investigating.
• EMPLOYEES: Now may be the time to get rid of any disgruntled employees. Happy and contented employees make for a profitable business.
These are just a few areas to consider to help increase profits and, subsequently, increase value.
• PRICING: Are the prices of the products or services set too low? Owners too often continue with the same prices year after year without revisiting their pricing structure.
• CUSTOMER SERVICE: Despite all of the above Elevating the quality or amount of customer service may not only increase business and support the higher prices suggested above, but also encourage customers to pay more promptly, increasing cash flow.
• EXPENSES: Owners should review what they pay for inventory, supplies, utilities, insurance, technology and any other expenses. Are you getting the lowest price possible? Are you taking advantage of all available discounts, etc.? It may pay to check pricing from other suppliers and vendors. Every saving increase profits and subsequently profits.
• INVENTORY: In some cases inventory levels may be higher than necessary. Retail operations want their stores to look “busy,” but they don’t need a basement or warehouse full of inventory. In today’s fast-moving economy, inventory can be supplied almost on demand – in most cases. This should be balanced by still taking advantage of special pricing on certain items or stockpiling hard-to-get inventory.
• OUTSOURCING: Some services, especially in today’s environment of the self-employed, can be outsourced. While replacing workers is not pleasant, and should only be done if substantial savings can be realized, outsourcing is often worth investigating.
• EMPLOYEES: Now may be the time to get rid of any disgruntled employees. Happy and contented employees make for a profitable business.
These are just a few areas to consider to help increase profits and, subsequently, increase value.
Why Seller Financing?
Many business owners would like to receive all-cash for their business when selling. And yet they are often told that this is really not possible. Why? Most people are accustomed to financing just about everything - home, car, vacation home, even college for their children. The first question business brokers are often asked is, "How much money will I have to invest to buy that business?"
Seller financing is usually necessary because of the lack of outside financing available. Certainly, some is available, but less than 90 percent of small business sales receive outside financing when selling. If you are selling, you may be one of the few lucky ones, but the business better be absolutely perfect.
If a seller is not willing to finance the sale, many buyers suspect a problem. After all, a business should be able to pay for itself and provide a reasonable income for a buyer. A buyer then wants to know what is wrong with the business that the seller wants all cash?
Aside from this, even if a buyer has all of the necessary funds, he or she may want to spend their money on improving the business, adding equipment, building inventory, or just keep it for working capital.
Another similar issue that is raised by sellers is that, if they are willing to finance the sale, they want some outside collateral to secure the loan on their business. They want to make sure that they get all of their money - with no risk. Buyers are very sensitive about this issue. Again, they raise the point about the business being able to pay for itself. They may feel that the seller wants additional security because of concerns about the business's ability to generate a reasonable profit. This is not a reassuring signal to the buyer. Most buyers are already using most of their capital for the down payment, and they generally are very reluctant about using their home or retirement funds for additional collateral.
The services of a business broker professional can usually provide guidance in the overall financing process. And financing is often the key to the successful selling of a business.
Seller financing is usually necessary because of the lack of outside financing available. Certainly, some is available, but less than 90 percent of small business sales receive outside financing when selling. If you are selling, you may be one of the few lucky ones, but the business better be absolutely perfect.
If a seller is not willing to finance the sale, many buyers suspect a problem. After all, a business should be able to pay for itself and provide a reasonable income for a buyer. A buyer then wants to know what is wrong with the business that the seller wants all cash?
Aside from this, even if a buyer has all of the necessary funds, he or she may want to spend their money on improving the business, adding equipment, building inventory, or just keep it for working capital.
Another similar issue that is raised by sellers is that, if they are willing to finance the sale, they want some outside collateral to secure the loan on their business. They want to make sure that they get all of their money - with no risk. Buyers are very sensitive about this issue. Again, they raise the point about the business being able to pay for itself. They may feel that the seller wants additional security because of concerns about the business's ability to generate a reasonable profit. This is not a reassuring signal to the buyer. Most buyers are already using most of their capital for the down payment, and they generally are very reluctant about using their home or retirement funds for additional collateral.
The services of a business broker professional can usually provide guidance in the overall financing process. And financing is often the key to the successful selling of a business.
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