Business Brokers - Sell Business - Business Sales and Acquisitions - SunbeltNE

The previous post discussed how you can go about selecting the right evaluator to value your business before you plan to sell a business. This post we go to the next step: Understand the various business valuation methods.

There are many methods to find the value of business but the most popular methods adopted by professional and experienced business brokers are the following:

Letter of Opinion:

The Letter of Opinion is a restricted use valuation intended for small companies with sales less than $250,000. The report runs to approximately 10-12 pages and provides only a brief synopsis of how the valuation conclusion was determined. The basis of this valuation is a market comparison with like companies within an industry.

Value Analysis:

The Value Analysis is a restricted use business valuation designed specifically for the “main street” business with sales of $1,000,000 or less. The report is intended for “asset sale, financial buyers” and provides only a summary of how the valuation conclusion was determined. The basis of this valuation is discretionary cash flow, since most Main Street businesses are bought and sold on a multiple of annual cash flow. The value considers primarily historical and current financial performance and very little time is spent with the Balance Sheet.

Formal Business Valuation:

The Limited Formal Valuation is a restricted use business valuation intended for the standard small business with sales between $1,000,000 and $5,000,000. The report is intended for “asset sale, financial buyers” providing a detailed review of all aspects that were considered in determining the final valuation conclusion. The bulk of the report is financial analysis and the valuation conclusion is supported in much more detail. In addition to reviewing the company’s historical and projected earnings, the report also contains a detailed review of the Balance Sheet.

M&A Valuation:

The Mergers and Acquisitions Valuation is a comprehensive business valuation for transactional purposes and is developed in accordance with the Uniform Standards of Professional Appraisal Practice (USPAP). This is a stock valuation and is intended for the middle market business with annual revenues in excess of $5,000,000, businesses that are expected to sell for more than $1,000,000, strategic acquisitions of niche businesses, and generally any business with significant growth expected in the future. The basis of the valuation is focused on future earnings and the selection of guideline companies comes from both the private and public markets.

IRS Revenue Ruling 59-60:

A USPAP governed valuation developed for litigation focusing on US Court Reviews, Cited Court Precedents, and in-depth analysis and research of minority and marketability discounts. This method is intended for Estate Tax, Gift Tax, ESOP’s, Divorce, and any situation requiring litigation. This valuation is normally used when the value of the stock is in question (minority or majority interest).

Now that we have discussed how to select the right business evaluator for your business and the methods of valuing a business the next logical step is to understand the business valuation process. The next post will discuss about the business valuation process.

Disclaimer : This blog is for information purpose only . It is intended to discuss in brief about commonly followed practice or industry-known principles, Applicability of this information is subject to change from time-to-time or differ from case-to-case basis. Readers are requested to verify their case facts with a qualified Business Valuation professional.

Are you wondering about the value of your business? The current economic meltdown has forced many small businesses to go down under the axe. If you are one of those who are ready to sell business, one of the most important things to remember is not to panic, keep a positive attitude and find the right value of your business. The current crisis has opened up a buyer pool of highly educated unemployed people who would like to check out the options to owing one’s own business. With the current downturn period, the buying terms become more favorable. The only consideration is the availability of easy credit. From a seller’s perspective, specifically the small business owners, they majorly face difficulty on how and where to begin their exit strategy? Next 4 blog series will take you through the entire business valuation process in a step by step manner to guide you to undertake a proper planned approach to put your businesses for sale.

To begin with, ask this simple question “Am I qualified and experienced to evaluate my own business?”


If it is an unchartered territory, start with selecting the right professional evaluator capable to handle the business valuation process professionally. Some of the expert business professionals who offer business valuation services are:

1. CPAs offer business valuation services. The knowledge gained from handling various accounting, finance and tax work allows an experienced CPA to gain knowledge that is well suited for valuing a business
   
   
2. Financial experts/consultants (Non-CPA) can also lend their expertise, but their background and experience needs to be investigated carefully before hiring them.
   
   
3. Business brokers are an obvious choice to value the businesses for sale as they have many years specialization in buying business and selling business which involves business valuation to negotiate and close the deal at the right price.
   
   
4. Commercial Real Estate Brokers/Agents are good at appraising real estate, but lack skills and experience to properly value intangible assets like goodwill.

• The American Institute of CPAs (AICPA) which grants the ‘Accredited in Business Valuation credential’ that requires being a CPA, passing an exam and business valuation education and experience.
  
  
• The American Society of Appraisers offers ‘Accredited Member’ and ‘Accredited Senior Appraiser’ designations which requires to pass exams and have business valuation experience and experience
  
  
• The National Association of Certified Valuation Analysts (NACVA) offers several designations including the ‘Certified Valuation Analyst (CVA)’ that require passing an exam and business valuation education.
  
  
• The Institute of Business Appraisers offers several designations including the ‘Certified Business Appraiser (CBA)’ that require passing an exam, and varying degrees of business valuation education and experience.

The recent economic recession has hit hard for the small to mid-sized business owners. It is at such times that the vulnerability and risk of owning and managing one’s own business is exposed.

Entrepreneurs who wake up a suddenly to find themselves in a desperate need to sell business, usually end up leaving lot of value on table which could have been avoided with careful exit strategy. A little bit of preparation can solve complex issues related to selling a business.

Be sure and explore the following potential groups of buyers to avoid being pushed against the wall with no options left:

Family Members:

Family members are the obvious traditional category if you have an entrepreneur lineage in your family. You also have the satisfaction of knowing that the business is still within the family.

But tread carefully. Due diligence must be practiced in answering issues like does the family member have sufficient cash to purchase the business? Can you give up complete control to another family member? Is it going to create rifts with other members? Generally an outside buyer can eliminate such sticky problems usually associated with family members as buyers.

The key to deciding on a family member as a buyer is threefold: ability, family agreement, and financial worthiness.

Business Competitors:

The main concern here is lack of trust and providing the competitor an undue advantage if they smell some trouble or a desperate need. Professional business brokers can help with such delicate situation to negotiate a confidential and worthwhile deal. The catch is of course finding the right competitor while maintaining confidentiality and discretion throughout the selling process.

The Foreign Buyer:

Economic downturn provides a window of opportunity to many foreign players who are looking for a way to be part of the great American Dream. They are ready to work hard and become part of the millionaire tribe. However, their business acumen does not necessarily coincide with that of the seller (as would be the case with any inexperienced owner). Again, only an expert business broker knows best how to approach these potential problems.


Synergistic Buyers:

Such buyers are looking for a synergistic growth for their business that would result in lower costs, new customers, and better supply source and especially in a downturn economy they are looking at way to strengthen and gain a competitive edge to survive and grow. In order to attract such buyers, your business portfolio needs to highlight features showing how buying your business could benefit them. An experienced business broker will prepare the right business portfolio to attract such buyers.

Financial Buyers:

This category of buyer comes with perhaps the longest list of criteria--and demands. These business buyers demand for maximum leverage, but if you prefer to continue to work with the company in an executive and managerial position, they are the right buyers. Their concern is mainly on the bottom line. Usually they offer the lowest purchase price compared to other buyers. A business advisor with strong negotiation skills can ensure you get the fair market price.


Individual Buyer:

The recent recession has forced many qualified top level executives out of jobs. So there will be many potential buyers in this segment looking for small business to buy to gain independence and control their destiny. The difficulty lies in finding one who is ready to make a plunge. Finding an executive who might be interested in buying a business may need some professional help from business brokers.

It is advisable to visit or speak to professional business advisors who have years of experience and would devise an exit strategy that will save time, money, energy and resources along with offering you comfort to deal with the grueling experience of putting you business on sale.

Applying for franchisee rights or buying an existing franchisee outlet can be the safest way to scratch the entrepreneurial itch as proven processes of decision making and business execution often mean a great difference between success and failure.



Following steps can help you review your franchise buying interests:

Step 1: Self analysis - Do an honest analysis of your personal strength, weakness and find out what kind of businesses you are passionate about and which areas you would not enjoy. Before planning to buy a franchise you should know and love the business that you plan to be a part of. Find out what kind of skills and abilities you have to help you in your search for the right franchise business.

Step 2: Financial situation analysis - Next step would be to find your net worth. If you have carefully gone over your own financial information, you should know exactly how much you want to invest as well as the highest possible number that you can afford to invest. Keep in mind that you will need start-up costs, franchise fees, back-up funds, and enough to live on without an income for at least one year, most likely two. In case you are not aware of how much it costs to buy a franchise, you can contact few business brokers around you and check franchise listings for sale to know the market conditions.

Step 3: Gather Right Intelligence - Keep your eyes peeled for industry information in your chosen franchise sector. Finding out if there is a continuing market for the franchised product or service is a crucial step in your search for right franchise opportunity. Take a look at the competition in the market you will be in, where the industry is going overall, and the sales potential of the product or service in your market. When you find an opportunity that you like, contact the franchise business representative or hire a business broker to investigate the opportunity and to help you in franchise buying process.

Step 4: Seek Professional Advise - Once you are serious about your franchise search, hire a professional business broker, who specializes in listing various profitable franchise opportunities in your area of interest. They will have attorneys, accountants and financers in their team to give complete support. Speaking to them will give you clearer picture of all that is involved. They will help in setting up meetings with other franchisors so that you have practical viewpoints and experiences from insiders to help you make the right decision.

Step 5: Hunt Resources on Franchising - Start collecting information and resources to help you in your research efforts to check best franchise opportunities. Seminars on franchising are often scheduled through Small Business Development Centers (SBDCs), located at larger universities and colleges. Your business broker is also an important resource for information provided you ask the right questions. Start taking active initiative and doing research in your chosen field in order to come up with all the right questions before you make the plunge. Follow the Boy Scout motto “Be prepared”.

Step 6: Narrow your Search - After carefully laying the groundwork and doing your homework, it would be easier to narrow the search and make it more ‘you specific’. By now you should have a firm grasp of what exactly fits your requirements and goals. Consider following important aspects for any franchise opportunity that attracts your interest: Demand, Competition, Brand recognition, Franchisor training and support, Growth opportunities, earnings and comparisons with other opportunities within the similar industry.

Step 7: Decision Making - The moment of deciding to buy a franchise would be easier if proper due diligence is followed as shown in above steps. If you still find the opportunity not quite right for you, then you need to rework. A professional business broker who has worked with many franchisee aspirants would know how to deal with potential issues and problems and would put their experience to good use to help you out.

In case you’re all set to sell off your business to pursue other plans, here’s some quick advise on ‘alert signs’ to watch out before assuring yourself that the deal is gonna be through.

WATCH OUT FOR THE FOLLOWING ALERT SIGNS WITHIN THE BUYER:

• Buyer lacks courage: The buyer may not have an urgent need to go into business. In many cases the buyer may begin with positive intentions, but then doesn't have the courage to make "the leap of faith" necessary to go through with the sale.
  
  
• Unrealistic: Some business buyers have very unrealistic expectations and believe that everything out there is for cheap price. They presume that the economic slump is going to force the seller to bow down for a lesser price.
  
  
• Fears hard work: Many buyers are not willing to put in the hours or do the type of work necessary to operate a business successfully.
  
  
• Lack support: Buyers can be influenced by others who are opposed to the purchase of a business. Many people don't or can't understand the need to be "your own boss."

• Environmental Problem: A buyer's investigation reveals some unmentioned or unknown problem, such as an environmental situation. Unfortunately, these should have been on the table from the beginning of the business selling process.
  
  
• Lack of substantial proof: The seller may not be able to substantiate, at least to the buyer's satisfaction, the earnings of the business.
  
  
• Governmental issues: Problems may arise, unknown to both the seller and the buyer, with federal, state, or local governmental agencies.
  
  
• Third party problems:
  

1. Landlords may become difficult about transferring the lease or granting a new one.
   
   
2. Buyers and/or sellers may receive overly-aggressive advice from outside advisors, usually attorneys. Attorneys, in their zeal to represent their clients, forget that the goal is to put the deal together. In some cases, they erect so many roadblocks that the deal can only fall apart.

While you may be planning to buy a business, don’t forget to check for these ‘six alert signs’ that could make or break your deal.


WATCH OUT FOR THE FOLLOWING ALERT SIGNS IN THE SELLER:

• Lack of commitment: In some instances, the seller doesn't have a valid reason for entering into the sale process. Without a strong reason for selling, he or she has neither the willingness to negotiate nor the flexibility to see the sale to a conclusion.
  
  
• Just testing waters: Such sellers are not at that "hungry" stage that provides the push toward a successful transaction. These sellers merely want to see if anyone wants to buy their business at the price they would like to receive.
  
  
• Unrealistic price expectation: Many sellers are unrealistic about the price they want for their business. They may be sincere about wanting to sell, but they are unable to be realistic about their business valuations in the marketplace. The demand for their business may not be there.
  
  
• Dishonesty: Some sellers fail to be honest about their business or its situation. They may be hiding the true reason for selling business; some might not even disclose that there are more than one owner and not all are in agreement to sell a business.
  
  
• Last minute changers: A seller may decide to wait until a buyer is found and then check with their outside advisors about the tax and/or legal consequences. At this point, the terms of the deal have to be altered, and the buyer won't agree. Nobody likes changes--especially buyers!
  
  
• Refusal for Seller Financing: Many sellers don't understand that lot of businesses are seller-financed. Buyers have to be able to make the payments while still making a living from the business. If the seller is hesitant to undertake this risk, how can he expect the buyer to put faith in buying the business? If the seller has a genuine reason to refusing for seller-financing, show him some easy financing options with PowerPay’s Pay Link program.

Once you have decided to kick off your dream of owning a business, you would either be looking forward to start right from scratch or search for an existing businesses . Here are some tips to buying an existing business.



It is essential to become aware of the business buying issues that will crop up and develop strategies to overcome it:

• Be a “doer” and not just a “looker”. If all you do is keep searching for that perfect match, you will never take that plunge. It is essential that at some point in time you have the guts to make the “leap of faith”. It’s not easy, but must happen if you want to own a business.
  
  
• Be ready to dig out lot of information. Especially if you are planning to buy a small business set-up, be prepared for record keeping practices that are not up to standards required by you or your business brokers. See to it you don’t lose a ‘gem’ of a business just because you did not make the effort to find out everything you wanted to make an informed decision.
  
  
• Think about how you will finance the deal. If you want the seller financing then don’t press the seller to lower the full price. You need to decide which is important, lower down payment or lower overall price. Be reasonable during negotiation. Take help of an experienced business advisor.
  
  
• Make sure you can afford the debt structure - don't obligate yourself to making payments to the seller that will not allow you to build the business and still provide a living for you and your family.
  
  
• Don’t try to push the seller to the wall. You want to have a good relationship with him or her. They will be teaching you the business and acting as a consultant, at least for a while. Be cordial and establish the right note of relationship with the seller.
  
  
• It's all right to negotiate on areas that are important to you, but don't negotiate over a detail that really isn't key. Many sales fall apart because either the buyer or the seller becomes stubborn, usually over some minor detail, and refuses to bend.
  
  
• The responsibility of investigating the business belongs to the buyer. Don't depend on anyone else to do the work for you. You are the one who will be working in the business and must ultimately take responsibility for the decision.

Selling a business is no child’s play and it is essential that all business owners follow these crucial steps to minimize the risks involved and ensure smooth selling process with possibilities of bargaining a better sale price.

Tip # 1:
Resolve current financial or any other business related problems thoroughly and as soon as possible. Especially in case of partnership business, it is essential all partners involved are in agreement of selling and there can be no future hindrances from any partner.

Tip # 2:
Get your financial records in place. See its up to date and accurate with impressive indicators highlighting your business in positive light. Ensure there is no manipulation of accounts and your records are true and fair. Its difficult to hide facts and its better to be open about them right from the beginning.

Tip # 3:
Be open to finance the sale. The quickest way to break a negotiation process during sale is refusing to finance part of the sale. It sends a clear indication that you don’t trust your business to earn enough to pay you back.

Tip # 4:
Scout for a professional business advisor or business broker. The professional ones earn every penny of their commission by helping you handle the technicalities associated with selling a business along with helping you keep your emotions under check. Your burden is almost halved when you hire an experienced business advisor.

Tip # 5:
Understand the different types of buyers to gain insights on what motivates each one of them.

• Strategic acquirer: They pay the highest prices, usually in cash. They buy for strategic reasons such as economies of scale and market share.
  


• Sophisticated or Corporate acquirer: With backgrounds in corporate America, these buyers examine a business closely. Size is less important than opportunity. They review several businesses before selecting one.
  


• Financial buyer: These are the most plentiful. They will not pay prices based upon projections. So they will not pay top dollar. These groups expect terms or the ability to finance the buy.
  


• Industry buyer: These can be the best or the worst. The best, when they have a strategic reason to buy. Otherwise, watch out! Most industry buyers look only to selected assets to determine value; they do not pay for goodwill or future prospects.

Tip # 6:
Prepare a good marketing plan to sell your business at the best possible terms. Be prepared with information on:

• Customer concentration: A heavy dependency on a single customer decreases the value of the business in proportion to perceived risk. It is better to have a larger and diversified base of customers.
  


• Margin Maintenance: Show how you manage costs and measure profitability.
  


• Credible Projections: Support with evidence your expectation for stable and increasing profits, so the buyer can see the opportunity in the business.
  


• Stability of Tenancy: Secure leases to eliminate relocation worries.
  


• Risk Perception: Anticipate situations that might raise a perception of risk.

An experienced business broker will help in preparing all of the above along with a good marketing plan to ensure that right buyers are attracted to your business.

Tip # 7:
Always maintain secrecy. It is essential not to create panic among your present employees, or give a reason for your customers to dessert you or provide your competitors undue advantage. This is also one of the reasons why business brokers are very essential during a sale of business. They ensure the confidentiality of both the parties involved

Selling a business is a skill that is acquired after repeated experience and gaining in-depth knowledge of various fields. It is more than just putting an advertisement on the internet, in a newspaper or spreading the word around. If you hope to get the right price based on business valuation, you will definitely have to do your homework and seek professional help on time.

After days of scouting for that perfect business opportunity; there is just the matter of signing the dotted lines. But even before congratulations do the rounds, the deal falls apart. What are the major points that kills a business deal? What keeps a sale of business from closing successfully? One of the major culprit is lack of proper understanding. Other criminals invovled are:

• A seller who is not up-front about problems of the business. Every problem has a solution…only if the buyer knows those problems. Remember the problem is definitely going to turn up like a bad penny and spoil that deal. Be open from the beginning.

• A buyer who goes back on the price agreed upon. Once the price is negotiated and agreed, its not right to revist the issue again and haggle ceaselessly. This jeopardizes a deal like nothing else.
  
  
• An impatient buyer and/or seller. Unecessary impatience will wear out a deal. It is essential to hire professional business advisors who know how to juggle the deal making process and successfully close a deal. Most people cannot handle the business selling and buying process as it involves expertise in various areas.
  
  
• A seller who is not serious about sale. Such sellers just want to test the waters and check for price that their business can fetch. But the seller is actually not ready to sell. A good business broker will only show you business listings from serious sellers.
  
  
• A buyer who is not serious about buying. Such buyer’s think they are ready to own their business, but later develop a cold feet. This usually happens with displaced executives dreaming of becoming enterpreneurs. Dreams are fine, but it takes commitment, grit and hard work to succeed.
  
  
• The buyer and seller don’t see eye to eye. In short they were never in agreement. How does this situation arise? Unfortunately, many times the buyers and sellers realise belatedly that they only assumed they were in agreement while in reality they did not see eye to eye on major issues. This leads to communication breakdown and often proves fatal to closing a deal.
  
  
• Unavoidable circumstances like an act of God/Nature might break a deal. Theirs no way out of this.
  

• A successful deal is dependent on ::..
  
  
  1. A professional and experienced business advisor
  2. Good chemistry between the parties involved
  3. Open communication and mutual understanding of the sale agreement
  4. Belief from both buyer and seller that they are involved in a good deal