Posted by Marc Gudema on Wed, Jan 25, 2012 @ 01:59 PM
When you are ready to sell your business, one of the most important decisions to make is what price to ask for your business. If you price your business too high, it will sit on the market. If you price your business too low, you give away money. How to price a business is an important factor in selling a business.
We offer a free selling price estimate to an owner who is thinking of selling their business. This methodology uses the sales and owner’s cash flow from the company and information on what comparable businesses sell for to estimate the selling price. This is the “market approach” to appraise a business and is one of the three approaches used in a full appraisal. This method is most helpful to estimate the selling price of businesses in which there are many comparable sales.
Another way to price a business is to use a full business appraisal. In addition to the market approach, the appraiser uses the asset approach – what the assets would sell for in an orderly liquidation – and the income approach – pricing the business as a multiple of the income. Full appraisals are particularly useful to price a business when there are not many comparable sales. If they are prepared by an independent, accredited appraiser (which ours are), they give credibility to the asking price.
On the average, businesses sell for 15% to 20% less than the asking price. But, this is not always true. If priced correctly, a business may sell at the asking price or above it. Selling a business above the asking price is more common if there is more than one buyer making offers and the price is bid up or the business has better sales and income since it was appraised and put on the market.
In the sale of larger businesses, it is common to market the business without a price. There are two reasons for this. First, it is thought by some that asking a specific price may limit the selling price. Secondly, the buyers tend to be more knowledgeable and have their own way of arriving at a price to offer. They don’t need the guidance that a price provides. It should be noted, however, that even with the sale of larger businesses without a price, buyers usually want to have some idea of how much the seller expects. They don’t want to waste their time analyzing a business only to find that the seller’s expectations are well above the price they would pay. In my experience, businesses marketed without a price tend to receive fewer inquiries. This supports the observation that buyers are looking for guidance on the price.
The range in selling prices of businesses is significant. The place to start is with a business appraisal – either the free market approach appraisal we offer or a full appraisal by an accredited appraiser. As a general rule, we price a business at the higher end of the range that it might sell for. It may sell for that price. Also, we have room to negotiate if necessary.
Posted by Marc Gudema on Fri, Jan 20, 2012 @ 02:20 PM
At various times, some tools have become essential for doing business. A hundred years ago, it was having a phone. In the more recent past, it has been using a computer. The latest tool you should add to this list is the smartphone. A smartphone includes so many tools that having them all in one place and easily accessible makes the smartphone essential.
One of the most important functions in a business is communication – with current and
potential customers, employees, and vendors. The first reason to have a smartphone is that it allows you to communicate much more quickly. Speed of response has a huge impact on getting new customers or additional business and resolving problems. The smartphone allows you to communicate quickly in whatever way is necessary – by phone, email, or text message.
Another important function of the smartphone is a productivity tool. You can keep your calendar on the phone, use it as a GPS, camera, or calculator, read documents, get up-to-the minute weather reports, listen to voicemail, browse the Internet, and more.
I prefer a smartphone with a large screen. The advantage of the smaller smartphones (about a 3.5” screen) is that they are easier to hold and operate with one hand. The advantage of the larger smartphones(about a 4.5” screen) is that they are easier to read since everything is larger on the screen. In terms of square inches, the difference is about 50% larger, about 6 square inches vs. 9 square inches. It is hard to read a document or browse the Internet on any smartphone. The difference in readability between the smallest and largest screens is significant. Before you buy, read an Internet page, a document, email, and watch a video on both sized screens.
Aside from your business, the smartphone is a great social tool and entertainment device. During sporting events, I’m text messaging with family and friends about the game. I wouldn’t be picking up the phone to call. Of course, there are many games you can play on the phone, by yourself or with someone else, listen to music, and watch videos. I recently read “Killing Lincoln” on my smartphone.
If you don’t already have a smartphone, get one. It will be one of the best investments you make.
Posted by Marc Gudema on Thu, Jan 05, 2012 @ 09:33 AM
For every business owner that lists their business for sale with a business broker, there are many more owners who would like to sell, but are afraid to put their business on the market. The primary reason is a fear that the business sale will not remain confidential. A breach of confidentiality could damage their business by causing it to lose employees or customers or damage supplier or bank relationships. So, instead of putting their business on the market, the business owner quietly sells to another company they know in the industry. In many of these business sales, the business owner mistakenly assumes that they probably netted as much as putting their business on the market because they would have had to pay a business broker’s commission.
There are two wrong assumptions that business owners make in this line of action. They
overestimate the chance of confidentiality being breached. And, they underestimate the loss in sale price that results from not putting the business on the market.
The chance of a breach of confidentiality, by a competent business broker using prudent methods to preserve confidentiality, is low. We have the business owner review any advertisement, before it is used, to be sure it does not contain information that would reveal the identity of the business. All buyers are screened for their financial capacity and must sign confidentiality agreements before they learn the identity of the business. When screening buyers, the business owner may review and approve all of them if they wish. If the owner is not approving all buyers, we will ask the owner to approve buyers that may be in the industry or known to the seller.
The loss in sale price that a business owner receives when the business is not put on the market can be huge. In one recent sale that we did, the business buyer paid 5 times what an industry buyer offered. The industry buyer had done other business purchases and said that their offer was what they typically paid. The eventual selling price was in-line with other offers and the appraised value of the business.
If you are thinking of selling your business, put it on the market to get the best price and terms. If you want a confidential business sale, ask how the business broker will keep the sale confidential and look at their track record for doing so.
Posted by Marc Gudema on Wed, Dec 21, 2011 @ 12:46 PM
EBITDA and SDE are two different ways of measuring the earnings, or income generating ability, of a business. EBITDA is Earnings, Before deducting for Interest, Taxes on income, Depreciation, and Amortization. SDE, or Seller’s Discretionary Earnings, is EBITDA plus deducting for all of the owner’s income and benefits. In calculating EBITDA and SDE, for purposes of pricing a business for purchase, one-time, non-recurring income and expenses should be removed and any income or expense not related to the business being sold should be removed. In both, normal expense for equipment replacement should be included.
Should EBITDA or SDE be used when pricing a business? Of course, both could be used. The multiple that is applied, depending on which measure is used, should be different. It would not be an accurate valuation to calculate EBITDA, which is normally much less than SDE, and use the multiples used with SDE. This would result in a low price.
The more important basis on which to choose between EBITDA or SDE is the nature of the business and the owner’s role in it. It is said that the small business owner is “buying a job”. This is because in the typical purchase of a small business, the owner is also the active general manager of the business. In this situation, the buyer is looking at all of the money available to the owner to live on, pay back any loans, working capital needs, and return on investment. The amount needed to live on is usually a large percentage of the SDE.
In a larger business, where the owner is not the general manager, the owner is looking at the business as an investment. A good measure of the return on the investment is EBITDA.
In the sale of most small businesses, the market price is based on SDE because most buyers will be owner operators. In many of these sales, the business does not generate enough money to hire a general manager and still generate an income satisfactory to an absentee owner. Another reason that buyers are owner-operators is because that is what they are comfortable doing.
If you are buying a business, know the difference between EBITDA and SDE and which measure is the best one to use when pricing a business that you are thinking of buying.
Posted by Marc Gudema on Tue, Dec 13, 2011 @ 12:36 PM
We’ve sold a number of franchised businesses. It’s not unusual that the owner lists it with us after having listed it for sale with the franchisor. Maybe some franchisors successfully resell their franchises, but our experience is that this is the exception. If you give it some thought, the reason is apparent. Think about who will actually sell the franchise – probably a local salesperson for the franchisor. They usually get compensated based on total revenues of the franchise in their area. It is not in their best interests to resell an existing franchise. It is hard to find qualified buyers for the franchise. When they have a buyer
who is interested in being a franchisee, they want them to open a new location to increase revenues. If they sell them an existing franchise, they just trade dollars.
Another issue to consider is who is looking out for your best interests. A business broker is paid on commission. The more we get for your business, the more we earn. But, a franchisor may have a conflict of interest. You may be paying them to sell your business, but the buyer will be their customer in the future. If the buyer pays more for your business, they may not be as able to afford upgrades to the franchise that the franchisor wants them to make.
We’ve re-sold many franchises. We, as a business broker have buyers who want to buy a business that is up and running. A franchise re-sale is this. A franchised business has other attractive features. They have a track record. They have a structured business operation. They have ongoing training and support. They are attractive businesses to many buyers.
There is one situation where the franchisor may be good for a resale – when the business is not doing well and in danger of failing. In this situation, the franchisor is in danger of losing revenues so there is an incentive to sell an existing location. On the other hand, if the business is not making much money, it is not attractive to the typical buyer that a business broker deals with.
If you are thinking of selling your franchise business, contact a business broker experienced in selling franchise businesses, not the franchisor.
Posted by Marc Gudema on Tue, Nov 08, 2011 @ 01:05 PM
In most sales of businesses, the business broker represents the seller. This is particularly true when a buyer is dealing directly with a business broker that has the listing for the business for sale. This business broker’s primary responsibility is to look out for the interests of the business owner and business being sold. Even if you are working with a business broker who is co-brokering the sale with the listing broker, the business broker may still be representing the seller, not you. Who the business broker represents should be spelled out in the confidentiality agreement or non-disclosure agreement (NDA) that you normally sign before you are given confidential information about the business.
If you are like most business buyers, you’ve never bought a business before. So you may not 
be knowledgeable or experienced in the process. Some buyers turn to their attorney and/or accountant for business advice. These professionals are knowledgeable and experienced in their area of expertise – the laws concerning business sales and analyzing the financial statements of a business, respectively. Use them for advice in their area of expertise, but not for advice in areas outside their area of expertise. A business broker, or a businessperson who has successfully owned a business in the type of business you are looking at, may be a good source for business advice.
Business brokering requires its own area of expertise. A business broker needs to understand financial statements, the operation of a business, the process of selling a
business, knowledge of the laws involving the sale of businesses and real estate, financing, due diligence, business valuation, property sales and leasing, negotiation and sales. My experience includes owning and operating two businesses with about 25 employees each and millions in sales for over 20 years. I have an MBA, finished a year of law school, earned a Certified Business Intermediary designation, and am a licensed real estate broker. Other business brokers have similar backgrounds. Using a broker when purchasing a business can help you avoid big mistakes and buy the business at a better price.
It may, or may not, cost you something to have a business broker represent you. BayState Business Brokers is a member of BBANE, a group of business brokers who co-broke their businesses for sale. We can represent the buyer in BBANE deals. In this situation, we are paid out of the deal in the same way that we would be if we were representing the seller. There are other business brokers who will co-broke with us and we are, again, paid out of the deal. But, some business brokers do not co-broke and some businesses are not sold through intermediaries. In these sales, you would need to compensate the business broker for their services on your behalf.
For most business buyers, buying a business is one of the most important financial transactions of their life. It is also one in which they may not be experienced or knowledgeable. If this describes your situation, find a business broker to represent you. The cost is cheap compared to the cost of making a mistake or paying too much for the business.
Posted by Marc Gudema on Thu, Oct 27, 2011 @ 07:59 AM
It’s not uncommon for a business owner who is considering selling his business, to ask me what percent of businesses we sell. The business owner looks at this figure like a batting average – a 
measure of how good we are and what the chances are that her business will sell if she lists it with us. Unfortunately, this percentage doesn’t really give that information. The biggest factor that affects this percentage is how selective a business broker is in choosing what businesses to sell, similar to how a baseball player’s batting average goes down the more bad pitches they swing at.
So, why don’t businesses sell? Here are some of the main reasons:
- They don’t generate enough income. A business needs to generate at least $100,000 in owner income to be of interest to most buyers.
- They are over-priced. A business broker can provide a valuation, but the market tells us what the business will sell for.
- They don’t have good financial records and, as a result, they don’t pass due diligence.
- They can’t get financed. Most buyers borrow most of the purchase price.
- They are too specialized and require skills that few buyers have.
Business brokers are not all the same and there are things a business broker can do to increase the percentage of businesses they sell. The best thing they can do is get more buyers to look at the businesses they have available to sell. Here are the many ways that we increase the number of buyers who look at the businesses we sell: First, we do what we can to increase the number of buyers that visit our website. We use search engine optimization to be listed high in search terms that buyers use to search for a business to buy. We also use paid Google Adwords to advertize our businesses for sale. We advertize our businesses for sale on the leading Internet business for sale websites. We market the business to our buyer database of business buyers looking for a business to buy. We market the business through BBANE, a group of New England business brokers who co-broke their businesses for sale. Finally, we use direct marketing to reach businesses that may be potential buyers for the business. By using all of these methods, we generate more buyers who look at the businesses we have available for sale. By doing so, the businesses we market tend to sell faster for more money.
The above list can go on, but these are some of the primary reasons a business doesn’t sell that are outside the control of the business broker. When evaluating business brokers, look at what they are doing to generate buyers if you want to get a better idea of how good they are and whether your business will sell.
Posted by Marc Gudema on Thu, Oct 13, 2011 @ 01:35 PM
The financial statements of a business can be audited, reviewed, or compiled by the outside accountant. When looking at a financial statement, the first sentence in the accountant’s cover letter will normally state the level of the accountant’s service. An audited statement is the highest level and is required of all publicly owned companies. But, audited statements are the most expensive and most small businesses don’t have them prepared unless they are required to do so. Accountants do not do any checking of compiled statements. They merely take the clients information and put it into financial statement format. Reviewed statements are in-between. Accountants do some checking, but not as much as in an audited statement.
A good example of the differences in the types of financial statements is shown in how the 
calculation of inventory is handled in each. In preparing an audited statement, the accountant is likely to be present when the inventory is taken. The accountant will check the inventory records against some actual checking to confirm that they are accurate. In a review, the accountant is likely to look at a printout of the inventory detail that shows the count and value for each item in inventory. In a compilation, the accountant will take the number provided by the business owner without checking it further.
Some businesses may not have their accountant prepare any financial statements. The accountant only prepares the tax return. This does not mean there is anything wrong with the business. It could be that the business is financially strong and doesn’t need financial statements prepared by an accountant for any outside party, such as a lender.
A normal clause in a purchase and sale agreement for a business is that, to the best of the owner’s knowledge, the financial statements are true and correct. If the business has no financial statements prepared or they are only compiled statements, it is typical that the representation is made on the truthfulness of the tax returns. Even if the business has audited statements, there may be an additional representation that the tax returns are true and correct.
No matter what level of financial statements the business has, a prudent business buyer should still do his due diligence to confirm the accuracy of the financial, and other, information provided. Regardless of the type of financial statement the accountant prepares, businesses should have good records to support the information in the financial statements.
Posted by Sarah Grossman on Tue, Oct 04, 2011 @ 08:50 AM
Buying a liquor store can be a profitable and enjoyable experience. But, there are a few things to consider before you buy a liquor store.
- Many buyers want to buy a liquor store because they have the expectation that liquor stores are unusually profitable and recession-
proof. Like all other types of businesses, the sales of a liquor store can suffer when the economy does. Also, as a retail business, the profitability of the liquor store depends on the product margins and overall volume of the liquor store, as well as fixed costs such as rent, utilities and employee wages. Two liquor stores can have the same overall revenue figures but very different net incomes.
- Liquor stores are best run by a full-time working owner. Running a liquor store absentee is difficult and leaves you exposed to theft, employee issues, and declining revenues. Most owners handle ordering, inventory, accounting/financials, employee management and some cash register duties in their liquor store. Some liquor store owners work an average of 60+ hours per week. Having a partner or family members who can work in the liquor store with you is always helpful and ensures you have staff that you can trust.
- You will most likely never find the “perfect” liquor store and if you have that expectation, you could be looking forever. Many owners keep their liquor stores for 20+ years, especially if it is a good and profitable liquor store. Instead of looking for a liquor store in a particular town, look for a liquor store in an entire region to broaden your search. Like any job, you should be open to relocating if you find a liquor store far from your home but with your desired criteria. Many liquor stores don’t have perfect financials, but try to do your due diligence in other ways. If you can do so, use an observation period in the liquor store or traffic counts outside for due diligence. And don’t overlook a liquor store that does well but needs some cosmetic updates. Those are easy to do.
A liquor store can be a good business to buy, but you need to investigate it like any other business. And, there are ways to manage a liquor store better so it turns out to be a good business for you.
Posted by Marc Gudema on Tue, Sep 27, 2011 @ 10:49 AM
People are used to negotiating over price and trying to get the best price. In the case of a real estate investment where the mortgage costs are a large expense and based on the price paid, getting a good price is very important to making money on the investment. When buying a business, the price of the business is important, but buying a good business is more important and paying a little more to get one makes economic sense. Typically, the extra price paid is recouped in a relatively short time.
In a traditional business valuation, there are three approaches to determining the value. What the business assets would sell for in an orderly liquidation – the asset approach -- is rarely the selling price of a good, profitable, business. The income approach uses return on investment or discounted cash flow to determine a value. However, buyers and sellers can differ on how much of a return is reasonable and a reasonable price for the business. The last approach, the market approach, looks at what businesses actually sell for. Common databases used are BizComps, the Institute of Business Appraisal, and Pratt’s Stats. If a buyer looks at actual sales, they will see a wide range of multiples – on sales or income -- that businesses actually sell for. An astute buyer needs to compare how the business they are buying compares to the average business to determine a reasonable price to pay.
Here are some other factors that a business buyer should consider. These might not show up on an income statement or balance sheet, but will affect the future earnings of the business.
Profit Margin – How does the profit margin of the business compare to the average business in its industry? An above average profit margin, over the long term, will generate much more income. An above average profit margin can indicate a better business to buy. The buyer needs to evaluate why the profit margin is higher than average and be sure it is not because the business is skimping on expenses that will hurt it in the long run.
Risk – How risky is the business? This requires evaluating what risk factors the business is exposed to and the chance of each occurring. Can its product or service become obsolete? Can they be replaced by an Internet offering? Is the company dependent on a few key customers, or a key employee, or location? How many competitors are there? Are there barriers to entry for a competitor? The less risky the business, the more it is worth.
Quality of Assets – The most obvious are any equipment. Is it up-to-date or obsolete? Will it need to be replaced soon? Even more important are the people assets. Are any key employees leaving soon?
Financial Information – Unfortunately, many businesses – even large ones – can have poor financial information. It is worth something to get good financial information – tax returns, income statements, and balance sheets -- that a buyer can rely on when buying a business.
When deciding how much to pay for a business, these are some of the factors that don’t show up on the financial statements that should be considered. Paying more for a better quality business usually pays off quickly.