Over the past 2-3 years is the business growing, flat, or declining? For example, Business A made $200,000 last year and $100,000 the year before. Business B made the same $200,000 last year, but $300,000 in the year prior. In almost every case, Business A is worth far more in the eyes of an individual buyer. They want to acquire a business that is growing, or, at the very least, is stable.
Ease of Transition:
Interestingly enough, most small business buyers will purchase a business outside of their area of expertise or experience. As such, it is important that the transitional period after the sale is something that the buyer sees as being reasonable.
A buyer must feel confident theyll be able to have a good grasp of things within a short time after they take over. This can only be accomplished if the business is well managed with policies, procedures and systems in place. If you want to know how easily the business will transition to a new owner, ask yourself the following question: If I get hit by a cement truck today, what will happen to the business tomorrow? For example, if the seller possess highly specialized skills that are critical to the business, or if the seller has long-standing personal relationships with clients that drive the sales, then these will be obstacles to a successful transition.
The Buyer Pool
Just like the transition period, there is a direct correlation between the purchase price of a business and the ease in which someone new can operate it. In the market, there are tons of people always looking to acquire a business. The greater the amount of those people who can see themselves running the business, the more demand there will be for the business, and therefore the higher the price and the better the terms a seller can get. If a business simply requires good all around business/management skills, then the buyer pool will be quite large.
Conversely, if highly specialized or certified skills/licenses are required to operate the business, the number of potential individual buyers shrinks drastically. In extreme cases, a seller may have to think about a strategic sale to someone in the industry.
Books and Records:
I cannot emphasize enough the importance of having good, clean and accurate books and records. It may very well be the single most important influencing factor of the price and terms when a business is for sale. There is no quicker way to kill a deal than having the buyer learn that the actual company records are not in line with what was originally represented. It is terribly upsetting when a deal falls apart, and though some may be salvaged, when its due to poor financial records often times the buyer will be: out the door, see no more.
Another aspect is unreported income. If you are taking in cash sales and not reporting it, then you cannot expect to be paid for it when the time comes to sell the business - you cant dance at all the weddings. If you had the benefit of not paying taxes for years on this money, and you have no quantifiable means to prove the number, then surely you cannot expect anyone to pay you anything, let alone a premium for this alleged revenue.
Typically, a seller wants to have this factored into the price. However, one must consider the provability of this unreported income. The questions becomes:
* Can you prove it? * How? * Do you even want to prove it?
You may want to be very cautious about this situation.
Having said all this, there is a way for you get the best of both worlds, as long as youre willing to make a small, short-term sacrifice. As soon as you decide to sell a business, start putting all the income on the books. The average business will sell in 7 - 8 months. During that time you can demonstrate to any buyer the increase in the top line revenue when you reported all the income. The difference in the selling price can be significant. More importantly however; it can be undeniable proof and full validation of your claim although you may need to agree to structure this portion as an earnout in order for the buyer to feel comfortable.
Customer Concentration:
Back to our example of Business A and B. Both companies generated the same profit to the owner for the past two years. Business A has one hundred clients, none of which represent more than five percent of the revenues. Business B has the same hundred clients, but two of them contribute forty percent of the revenue. Which company is worth more? Business A of course! If one or two of Business Bs clients stop buying, the business could decline by almost half.
Exclusive Products or Services
If there is an element of exclusivity to the business, whether in product or territory, this can be a huge selling factor. Naturally, the buyer will want to see this transition to them and so you need to consider this situation. For example, in a distribution business that has an exclusive territory, it will be paramount (and definitely a deal contingency) that the relationship with a particular supplier for example will continue. Conversely, if the entire business relies on this relationship, it can hurt you. Its the supplier version of customer concentration. However, if the relationship is solid and a new contract will be granted to a buyer, it can be worth a premium in the sales price.
Recurring Revenue
Any business with a strong recurring revenue base is both highly sought after and will almost always command a premium. Examples are alarm monitoring companies, marinas, self storage facilities, and some pest control businesses. The lure is that a new buyer is almost assured of continuity and can count on revenue from day one. If any part of your business has a recurring revenue component, then play it up. If not, think about ways that you can possibly generate some; it will be well worth the effort and expense to do so.
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When is it a good idea to use a broker?
If the seller thinks that it will be difficult to run the company AND put in the time and effort to sell the company, then retaining a business broker is a good idea. This is the most compelling reason we know.
Other reasons to hire a broker:
1) The seller recognizes that selling is not core management strength, and should be outsourced to an expert.
2) The management team has suffered a disaster that makes the task of selling the company unbearable.
3) The seller does not know how to maintain confidentiality, and is worried that employees, customers, vendors and competitors will learn that the company is for sale. (This is the easiest problem to solve, by the way).
4) The seller does not know how to qualify potential buyers before disclosing confidential materials.*
5) The seller does not know how to realistically value the company.*
6) The seller is unfamiliar with the acquisition process.*
7) The seller does not know how to find potential buyers.*
8) The seller has difficulties writing high quality marketing materials for potential buyers.*
*There are many resources for sellers, including MidMEx, that can help the seller address these issues.
What is the best way to find a business broker?
Unlike realtors, business brokers are not licensed or regulated by any State or Federal agency. Virtually anyone can call himself or herself a business broker. Someone can call them self a business broker without having to graduate from college, take a certifying test, or have any actual training or experience. Few business brokers have actual business degrees.
Most firms that do business brokerage are small outfits, consisting of one to four people, and have been in business for less than five years. There are few larger firms operating in several states, however they face two substantial limitations. The first is that State Boards of Realtors require business brokers to have a real estate license in any State in which they do business. Real estate is often a substantial part of the sale of a middle market company.
The second limit is that the larger firms often focus on selling smaller companies (known as Main Street deals) - mom and pop companies generating $50,000 - $500,000 in annual revenue. They lack expertise in middle market deals. Would you hire a Chevy salesman to sell your Ferrari, or let a nurse to take out your appendix?
Most business people have never heard of the business brokers in their communities, even if they have been in business for twenty years. Your accountant, corporate attorney or wealth manager may be able to refer you to a broker.
There is one national association of business brokers, the International Business Brokers Association. Virtually anyone can join by paying a membership fee, so that membership alone means very little. However, the IBBA offers many courses of instruction, as well as a certificate once these courses have been competed. Members of the IBBA, who are also certified business intermediaries (CBI), are likely to be well trained. Unfortunately, there are fewer than 200 CBI members at last count. [Full disclosure: author is a member].
What do business brokers charge?
Whether certified or not, brokers use a standard formula for calculating their commission. Their fees, which are often based on the successful sale of the company, are a percentage of the sale price. The commission percent rate decreases with the size of the sale, according to the schedule below. Here is an example of the calculation of a $600,000 commission on a $12 million sale:
Percent Sale price, millions Commission, $
10 First million 100,000
8 Second million 80,000
6 Third million 60,000
4 All additional millions 360,000
You can calculate the commission you will pay using this formula. You will then be able to better decide if you think you are too busy to run the company and sell it.
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Article Source :
Ben Needles has sinced written about articles on various topics from Business Credit Cards, Anger Control and Business Credit Cards. About the Author (text)Dr. Mark Heitner is the founder of MidMEx (). Many patients have been owners of mid-sized companies with a bus. Ben Needles's top article generates over 550000 views. to your Favourites.