FOOD FOR THOUGHT
BEFORE YOU SELL YOUR BUSINESS. Proper preparation will maximize what you receive for your business. First and foremost, maximize profits. Sounds like a no-brainer, but too many sellers ease up their efforts as soon as they decide to exit the business. This is not the time to try to practice income tax avoidance – profits have a direct correlation to your business value. Of course, a proper business valuation for privately owned businesses considers the Seller’s Discretionary Earnings (SDE), that utilizes all the value the owner(s) receive from the business in addition to profits. You will want an accurate valuation and it should be performed by someone with real experience at doing valuations for pricing. A computer program or app that does valuations won’t stand up in the real world of mergers and acquisitions. Do make sure in advance of any attempt to sell that all your documentation is accurate and current. Part of the process of selling is due diligence, the opportunity for the buyer to verify all that was presented to create a sales contract – it is critical that all you claimed is backed up with appropriate documents. Any equipment and technology should all be in good working order and in a brick and mortar business the operating facility should be clean and orderly. It is also a good idea, in most cases, to keep the whole process confidential and only involve those with a need to know. The preparation for selling should start twelve to eighteen months in advance of placing your business on the market and can easily take that much time again to complete the process once it is available for sale. Your continuing involvement after closing can be expected as well as most buyers will require some hand holding when they first take over. Consider using a good, trusted professional who can provide an appropriate valuation and has the knowledge and experience to confidentially market your business with a minimum of stress and when a buyer is found, to guide you through the transaction process to its conclusion.
SELLING A BUSINESS. This is usually a once in a lifetime event. It is not an easy task and takes time and a considerable amount of effort to find the right buyer. Properly pricing a business is always very important and so too are the terms of the sale - how and when are payments to be made and to whom. There are many elements to be considered in making these determinations and in marketing the business. Some of the elements include customers, contracts, equipment, equipment leases, location, employees, receivables, payables, loans, etc., etc., in addition to the all-important sales volume, profitability and cash flow. Even if the business doesn’t have all of these elements it can still make for a complicated transaction process. And, except maybe in the case of on-line business there is the real property issue – it is always in play one way or another. Understanding all the elements and issues is why it is critical for business owners are best served by using an experienced and properly licensed Mergers & Acquisitions professional (Business Broker) to assure the best deal possible.
BUSINESS VALUATIONS. Formal business valuations use several financial approaches to arrive at a determination of value, each one provides a dollar value and each will be different. However, the widely accepted approach to determining the value of a profitable operating company is its cash flow. For large companies it comes down to a multiple of its EBITDA. That’s Earnings Before Interest, Taxes, Depreciation and Amortization. For smaller, privately owned businesses it is the SDE that is meaningful. SDE is Seller’s Discretionary Earnings. And the reason it is meaningful is because small business owners often avail themselves of the many perks that come with owning a small business. These perks represent some of the business cash flow and are referred to as “add-backs”. The valuation starts with the Net Operating Profit shown on the tax returns and is adjusted for the add-backs. The owner’s salary is an add-back as is depreciation and any company paid expenses that benefit the owner. Such items might be company paid health insurance, cell phone usage, vehicle usage and fuel, etc., etc., etc. All are just another way of taking profits out of the business and are indeed part of the cash flow and important in determining the value of the business.
WHY A BUYER SHOULD USE A BUSINESS BROKER. There are many on-line sites that offer businesses for sale. Most of them are put there by Business Brokers, so, in truth, it is hard to avoid working with a Business Broker. But these brokers represent the sellers of those businesses and what we are discussing here is the use of a Business Broker by and for a buyer. A competent Business Broker has hands-on experience analyzing all kinds of businesses on a daily basis. Such a broker can determine, better than anyone else, a business’s value in the current market. A potential buyer can be well served by choosing an experienced firm or individual at the very start of a search to buy a business. A buyer who does this is likely to have more and better choices and even more likely to save on the purchase price. Why? Because the broker keeps abreast of the market, knows where and what to look for, and can negotiate from the strength of experience. There are also “pocket listings” to consider, listings that aren’t advertised, usually because a seller has an interest in selling, but has not yet made a formal commitment. But brokers often leak this information to other brokers in the hopes of finding a buyer that will help them obtain the seller’s listing. And when choosing a Business Broker, as a buyer or a seller, it is always advisable to use one who is also licensed in commercial real estate in the State of your potential interest. Every brick and mortar business sales transaction includes either the lease or sale of a real property, and only a licensed real estate broker is authorized to conduct such transactions.
EXIT STRATEGY. When someone begins to accumulate assets he/she creates a LAST WILL & TESTAMENT for the orderly transfer of those assets when that individual departs this world. That’s an exit strategy. When starting or acquiring a business there should also be an exit strategy. The business owner has obvious goals like independence and personal wealth accumulation but what is the end game? Is it to sell out, to pass on to the next generation, or some other goal? If it is to sell out then it is important to keep accurate and up-to-date records and grow the business in an orderly fashion. A business sale is not valued on what it should or could be if …, but on its cash flow - and that must be backed up by complete and accurate financial records. Passing the ownership and operation of the business to the next generation is frequently an exit strategy, but make sure that generation has the equal capability and “fire in the belly” as the current owner. Statistics show a failure rate of 75% for second generation owners and 90% for the third generation. Building value and selling may be the better choice for all concerned.
I WANT TO OWN A BUSINESS. Certainly this is a thought many of us have but for most it never happens. Change alone is a barrier and when it means giving up a regular hours and a regular pay check the barrier gets steeper. But the flip side is attractive when the idea of owning a business with the freedom to guide your own destiny is the higher priority. Then the decision is whether to start your business from scratch or buy an existing one. While there are exceptions, buying an existing business where there are already footprints in the sand is the better choice – especially with professional guidance.
COMMERCIAL REAL ESTATE CONTRACTS. A residential sales transaction is initiated via a standard residential contract form. Commercial transactions are more complex thus residential contracts are inappropriate for the sales or leasing of commercial properties. Each commercial transaction is unique and requires customized documentation. The same can be said about brokerages: Residential brokers are always the best choice to use for residential transaction and commercial brokers have the knowledge and experience to create successful commercial transactions, be they commercial, industrial and investment properties.
THE MARKET VALUE OF A BUSINESS OR PROPERTY. Ever want to know what your business or commercial property is worth in today's market? Even if you aren't thinking of selling now that information may be desirable or even necessary should you need to meet a legal requirement. Talk to your CPA about preparing a formal appraisal. If your interest is to find out how the market is likely to value your property or business the more practical approach (and less expensive) route can be provided by a broker. For property talk to a Real Estate Broker about preparing a Property Valuation or talk to a Business Broker about preparing a Business Valuation. LANDMARK COMMERCIAL LTD can provide either or both.