The Business Transfer Report

Business Valuations

What Is A Business Worth? 

Determining the value of a business is the first step in the process of buying or selling a business. The value of a business is related to the risk involved, the ability to generate an income stream, and the value of the tangible assets. 

An expert valuation report will be based on standard valuation methodology combined with experience and knowledge of the valuation expert. The specific purpose of the business valuation and the size of the Company determine the depth of analysis and research required. 

Basic factors that influence value are:

• Value of the hard assets
• Recast cash flow analysis: normalize earnings
• Calculate and apply external factor discounts
• Analyze intangible values

The final step of a valuation report is to make sure that the suggested price for the business passes the sanity test:

• Will the income cover the debt service?
• Will the cash flow provide the owner or manager with a reasonable salary?
• Can the cash flow provide for future capital equipment requirements?
• Will the cash flow provide a cushion to allow for fluctuations cycle?

A Guide For Business Buyers & Sellers

Your best guide for buying or selling a business isn’t words in paper- it’s the presence of a competent business broker, who will provide vital services for both buyer and the seller. The Broker acts as the “glue” for holding together the pieces of the business sale process.

The Business Broker and the Seller

When it comes time to sell, one of the best decisions a business owner can make is to continue managing his or her business efficiently, while depending on the services of a business broker to orchestrate the sale. To make the seller’s job easier and more effective, the business broker will…..

Determine the right buyer for a particular business. A business broker uses computerized databases to access comprehensive lists of local, national, and international buyers-all to increase the chances of selling a business at peak value.

Advice the seller on pricing. The business broker is an expert in placing a realistic price on the business or arranging for a 3^rd party business valuation, thus reducing the danger that every seller fears-under pricing the business.

Prepare a marketing strategy. Marketing tools, such as a Confidential Offering Memorandum, Blind Profile are necessary in presenting the business as effectively as possible. The broker can also help in the structuring of the sale transaction and introducing the appropriate tax and legal professionals into the deal.

Present offers and point out both strengths and weaknesses. The business broker will be a vital advisor during most stages of the negotiation, bringing to “the table” objectivity as well as negotiation skills developed through years of experience

What To Do If You Want To Sell Later

You have to sell your business when you are ready and when the time is right. A competent business owner should always have an exit strategy when it comes to his or her business. Unless you are going to pass the business on to a family member or liquidate the business, there will come a time when you will sell. The following items will ad value and increase the marketability of your business.

Increase yourself from the business

Sales, sales, sales to business are equivalent to location, location, location for real estate – the key element that buyers look at when they are evaluating a business for sale. Buyers are hesitant to purchase a business with sales on the decline. If they do, the value they are willing to pay always at a deep discount. Once business owners know they are getting ready to sell their business, they need to continue to focus on running the business.

Remove yourself from the business

If you are the business owner who is “Norm” from the sitcom “Cheers” – where everyone knows your name – that may be great for business, but not good for business transfer. In order to maximize the value of your business, owners have to disassociate themselves from the business and have customers, employees, and suppliers sign on because of the company, not the owner. The best method of removing yourself from your business is to train your right-hand person to be able to take on your responsibilities. The more infrastructure you have the more valuable your business will become.

Develop a strong management team

Besides removing yourself, developing a strong team is important. The expression: “People are the most important asset in a business” could not be any truer when a business owner is selling his or her business. A buyer can analyze financials and examine equipment and inventory to determine tangible economic value. This analysis is clear-cut. One of the major factors that will move this value up or down is the quality of your employees.

If you want to sell your business for the tangible assets and financial figures, you will receive that minimal value. The extra amount is your employees.

Replace family members working in the business with other employees.

Having your family members work with you is a great way to build on your family relationship. Unfortunately, it could be a huge detriment when it comes to selling your business. Even if the family members agree to stay on after the business transfer there are still concerns that a buyer could have, such as the perceptions that family members are not always the most qualified employees, and that they are paid more than non-family members. A buyer might think he is getting the most qualified person for the job.

Reduce the amount of personal perks in the business

Most small business owners “live” out of their business. If they have hired a good accountant, their net income on the year-end tax return is usually between $20,000 and $80,000. By no means does this mean the cash flow to the owner could not be much higher. So where is the difference? Personal perks. These personal perks to the owner can include: health insurance, auto insurance, meals, entertainment, travel, etc.

EBITDA (Net Income + Interest + Depreciation +Amortization) is the most common form of cash flow to a buyer. In a small business, personal perks can often be a large percentage of the total cash flow to the owner. Since lending institutions and buyers focus on EBITDA, it would be wise to reduce or eliminate personal perks for one to two years prior to selling a business.

Sell off all unnecessary assets

Every business owner has accumulated obsolete, duplicate, or unnecessary assets over time. It is difficult to obtain a price that is based on the high amount of assets in a business if they are nor necessary for the operations of a business. By selling the assets in advance, the business owner gains twofold: sale of assets and a better purchase price value that will make the business more marketable.

Develop a strong sales force (if applicable)

A salesperson is very easy to find, but a good salesperson is very difficult to find. Most businesses sell a product or service and each of these businesses can improve their sales with additional salespeople. When selling your business, a prospective buyer will pay special attention to the method used to increase sales. If you, as owner, are the only salesperson, red flags are bound to come up.

Diversify your customer base

A buyer doesn’t want the risk of the business’ customer base if it is concentrated into one or two customers. Diversifying your customer base will not only increase the chances of selling your business, but also will stabilize your sales and reduce the effect of losing a customer. To be most effective it would be good to not have a one customer with over 20% of your business. 

Turn Your Seller Carry back Note Into Cash
Guide To Selling Your Private Business Note

Every year millions of dollars in business notes are created nationwide when business buyers cannot arrange traditional or SBA financing to purchase a business, causing the seller to “carry the paper.” That means the seller is holding a promissory note from the buyer, who is making monthly payments.

Sometimes the seller is perfectly content to receive the payments over 3, 5, or more years. More often, they will have needs for cash at some point.

8 top reasons clients choose to sell their notes:

• To purchase their next business venture
• Purchase real estate, a boat or a plane
• Eliminate debt
• Enhance their investment portfolio
• Take a dream vacation
• Fund college tuition
• Eliminate the hassle and worry of collecting payments

What is your note worth?

The value, of a note is established by a number of factors, including the dollar amount being sold, the amount of cash down-payment made for the business, the type of business sold, hard assets in the business, the buyer’s previous experience in the business purchased, “seasoning” of the note  (how long the payor has been making payments). And the creditworthiness of the payor.

The selling of a business note has no effect on the payor (buyer of the business). All the terms and conditions set forth in the original note remain in force. The only change will be to whom and where future payments are sent. Holders of notes can sell the entire note or just some part of the note. Full liquidations usually offer less cash relative to the entire note because of the number of payments involved; so many business owners find that a “partial” or “split” payment program usually makes more sense. Often, it is best to figure out how much cash is ultimately needed and sell a portion of the note based on that amount.

The good news for business sellers is that there is an option available for them to acquire “immediate cash today” from their “future” income stream. 

Critical financial Planning Considerations Before, During, And After The Sale of A Family Business

“A million dollars isn’t what it used to be” – Howard Hughes 1947

“A billion dollars isn’t what it used to be” – Ted Turner 1997 

Carefully Consider What Financial Independence Means To You

If you expect the proceeds of the sale of your business to help provide the means for financial independence, you need to determine what that actually means to you. Financial independence isn’t necessarily about retirement. It is about choice. It means that is you decide to work in some capacity after the sale, it is because you choose to, not because you have to. 

So what will it take for you to consider yourself financially independent? 

Start by taking the time to prepare a family budget. Be sure to include those inevitable “perks” that business owners often let the company pay for such as a leased car, cell phone, season’s tickets, etc. If you are under the age 65, you are not eligible for Medicare. You must include the cost of an individual or family health insurance policy. This could cost $1,000 per month or more. Meet with a health insurance specialist; don’t estimate this cost as it can vary considerably depending on your age and health. 

Do you plan on traveling more? How about that second home in the mountains or on the beach? Should you pay off your home mortgage? Would it make sense to downsize the primary residence? This exercise will result in an after-tax monthly cash flow figure that represents your definition of financial independence, expressed in today’s dollars. 

At this point, it usually makes sense to engage the services of a CFP (Certified Financial Planner) to produce an analysis comparing your means (proceeds of the sale of your business plus additional assets and income sources) to your financial objectives. The plan should also address any existing home mortgages, second home funding, and other issues not directly related to day-to-day lifestyle funding. You and your planner will also need to agree on critical assumptions such as future inflation, age of mortality (how long you may be expected to live), and how much you want to eventually leave to your heirs and/or charity. 

And finally, your planner must have a clear understanding of your tolerance for risk in the financial markets. 

The resultant analysis should first determine if your objectives have a reasonable probability of being achieved. If not, you must either reduce your goals or perhaps delay the sale of your business until you can sell for a higher price or until additional income, such as Social Security, becomes available that would help make the plan work.

However, if your goals are determined to be achievable, an investment portfolio should be presented that will allow you to achieve your objectives while taking on the least risk possible.