June 2012

You’re considering selling your business.  Your accountant or financial advisor has reviewed your profit and loss statement, and told you what he or she thinks your business is worth. Is this a valid figure? Do the numbers reflect the real value of your business? Below are some other factors to consider regarding the true value of your business. These factors may not have a specific dollar amount attached to them, but they certainly influence value and the price a business may sell for.

•    Are you serious about selling, and is it the right time? (Use this only if selling is the reason for the valuing.)

•    What are the two or three biggest obstacles to growing the business?

•    Why is your business different than the competition?

•    If you don’t own the real estate, what is the status of your lease?

•    What is the short-term and long-term trend of your business and the industry?

•    Does, or can, international competition impact your business?

•    Why do customers patronize your business, or why do clients use your services?

•    Have you increased prices recently, and if not, why not?

•    How much will you need to invest in your business over the next three to five years to maintain your customer/client base? How much to increase it?  How will you spend it?

•    Are there any legal or governmental issues facing the business?

•    If you got hit by the proverbial truck, is there someone who could run the business?

•    Can the business be relocated? Should it be relocated?

•    What are the secrets to the current success of the business?

•    What prevents the business from growing?

•    If the business is based on your personal goodwill with customers, knowledge of the product or services, etc., are you willing to stay for a fairly long period of time to assist in transferring this personal goodwill?

•    If you were given an additional $100,000, and you were much younger, what would you do to grow the business?

An old saying in negotiating the sale of a business goes like this: The buyer says to the seller, “You name the price, and I get to name the terms.”

Another saying used to explain the actual value of the term full price: “If we could find you a business that nets you $250,000 a year after debt service, and you could buy it for $100 down, would you really care what the full price was?”

It seems that everyone is concerned only about full price. And yet, full price is just part of the equation. If a seller is willing to accept a relatively small down payment and carry the balance, a higher full price can be achieved. On the other hand, the more cash the seller wants up front, the lower the full price. If the seller demands all cash, barring some form of outside financing, full price lowers – and, in most cases, the chance of selling decreases as well. Even in cases where outside financing is used, such as through SBA, etc., the lender will do everything possible to ensure that the price makes sense.

Sellers should understand that both what they hope to accomplish in the sell of their business and the structure of the actual sale can dramatically influence the asking price. Price is obviously important, but other factors may be even more important. For example, consider a seller with health issues who needs to sell as quickly as possible. In his case, timing becomes more essential than price. Another seller may place more importance on her business remaining in the community. In her case, finding a buyer who will not move the business may supersede price or certainly influence it.

Likewise, the structure of the deal can both influence price and be a more significant factor than price to either the buyer or the seller. The structure can dictate how much cash the seller receives up front, which may be more important than price for some sellers. On the other hand, sellers should also be aware how much the interest on their carry-back can add up to. If cash is not an immediate concern, monthly payments with an above-average interest rate may be enticing.

These examples all demonstrate the importance of the business broker professional sitting down with the seller prior to recommending a go-to-market price.  During this meeting, the broker should find out what is really important to the seller, as these issues may have a direct bearing on the price.

Sellers should look at the following factors and rank them according to importance on a scale of one to five, with five being extremely important.

•    Buyer Qualifications
•    Full Price
•    Amount of Cash Involved
•    Financing
•    Confidentiality
•    Commission/Selling Fees
•    Closing Costs
•    Exclusive Listing
•    How the Business is Shown
•    Advertising/Marketing
•    How a New Owner Continues the Business

By ranking these items and discussing them with a professional Business Broker, a seller can receive helpful advice from the broker on price, terms, and structuring the sale.

Many business owners probably have asked themselves this question. There are many unique and different types of business. Some fill very small niches while others have carved out a unique product or service while still others require a unique or very specialized talent, knowledge or experience. An owner of a “unique” or at least unusual business may feel that there is no one out there who would buy it.

Almost all businesses are saleable, but the big question is: Is the seller willing to sell? Because of Internet marketing and other new technologies, business brokerage professionals know how to reach potential buyers world-wide. Somewhere there is a buyer for almost every business. Locating the right buyer is the job of the business broker professional, who recognizes that the seller’s willingness to sell is the key. Why is a seller selling; what is important and what is not. If a business owner just wants to see what the market might pay for the business; or hopes to “make a killing” on a sale – it most likely won’t sell.

Gauging what is most important in the selling process is very important. Following are some critical factors that every seller or would-be seller should assess:

• Full price
• Down payment
• Keeping existing employees
• New owner’s plans for the business
• Confidentiality
• Selling costs
• Buyer qualifications
• Keeping the business locally
• Providing jobs for children/relatives
• Structure of the sale

There may be other factors that are important. Keep in mind that every one comes with a string attached. What are the most important ones? Will you bend on them? Will you lose a sale over it? Businesses with a broad appeal and a successful track record are in a much better position to stand firm on the important factors. The unique or niche businesses or those with a less stellar track record may have to be willing to bend on any or all.

Sellers should tell their business broker professional what is really important – and take note of the one or two factors that could be “deal-breakers.”  Remember: almost all business can be sold, but every sale requires a willing buyer – and a willing seller.

This is often a prospective buyer’s first response when given the price of a seller’s business. This is especially true today when many excellent and profitable businesses have few hard or physical assets. For years, buyers, and even business appraisers, have called the difference between the actual physical assets and the asking price as “blue sky.” Goodwill has often been a prime force behind the blue sky concept, and it is one of the reasons a potential buyer might feel that the seller is asking an “arm and a leg” for the business. Goodwill has been called many things – very few of them good.

However, today’s goodwill is more than just the hard work and effort a business owner has put into building the business. The Web site name alone may be worth a lot of money. Think “Google,” which by now may have achieved the same name recognition as Kleenex. If another search engine company could use that name, the business could be worth millions – even billions. The technology behind the name has a lot of value, but it’s important to remember that the name recognition or brand name, which is known all over the world, is also where the big bucks lie.

How does this relate to goodwill? The goodwill of a business can include patents, copyrights, its Web site and/or domain name, licenses, trademarks, proprietary software, secret recipes (What is the value of the secret recipe for Coke?), royalties – the list goes on and on. Would a McDonald’s business, assuming the same sales and profit, have the same value if the name and franchise were not included.

Buyers are beginning to realize that much of the value of a business in today’s world is not to be found in the hard assets such as the fixtures and equipment, but in the intangibles that create the income. Take the McDonald’s just mentioned, it may have beautiful stainless steel equipment, but the equipment is only worth the income it can produce; and to take it a step further, there are warehouses in every major city in the country full of “for sale” stainless steel equipment. The real value is the name and what it represents to the dining public.

For those who are considering selling their business in the near future, this new emphasis on goodwill means that some business procedures need to be changed. Operations manuals should be copyrighted, Web sites and domain names should be protected,  product and specific service names should be trademarked, inventions patented. There needs to be emphasis placed on intangibles that have to be earned, such as name recognition, brand names, employees, business relationships with suppliers and customers, long-term advertising, reputation, etc. Don’t let anyone tell you that goodwill doesn’t have value – it is most likely the most valuable asset of your business.

Goodwill should be as protected as the law will allow. A visit to an Intellectual Property attorney may well be the best investment a seller can make.

For those who are considering buying a business, make no mistake about it, in many cases, what you are really buying is the goodwill of the business. If a buyer is still hung up on buying the stainless steel equipment, we have a warehouse full of it for sale!