The Complexities of Valuations
A lot of training and experience goes into good valuations. A variety of complex factors are involved. Plus, there are certainly some subjective elements. That means that one professional’s valuation may be different from the next. Let’s take a look at some of the factors involved when it comes to achieving an accurate valuation.
Intellectual Property
Determining the value of IP or other intangible assets can be difficult. If the business in question has trademarks, copyrights and patents, it can be far more challenging to properly assign a value.
Products and Services
As it turns out, businesses that only offer one product or service are far more difficult to analyze. If a company has a lot of product diversity, a professional will typically assess a higher value. The same is true for companies that have only one or two key customers. Lack of customer diversity can bring down overall values.
Employee-Owned Companies
If a company is partially or completely employee owned, it can lower its marketability. Many company owners do not realize that employee stock ownership plans (ESOP) can change its overall value.
Life-Cycles and Supply Chains
In some cases, a business is nearing obsolescence due to advancements that have taken place. We often see this in technology companies. It should come as no surprise that if a business is near the end of its life cycle, this will raise potential issues during the valuation process. On a similar note, could the business be susceptible to supply disruptions? If a business is assessed as vulnerable in that area, it could also lower an overall valuation amount.
Accuracy of Data Received
Of course, the person handling the valuation must rely on the accuracy of the factual information they receive. If the numbers are off, the valuation simply cannot be as accurate.
These are just a few examples of the list of issues that can impact a valuation. If you’re trying to get an idea of what your business may be worth or if you ‘re wondering what factors might impact your valuation, reach out to our team. We’d be happy to discuss this in greater detail.
Copyright: Business Brokerage Press, Inc.
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What Do Buyers Really Want?
When sellers get ready to put their businesses on the market, they often wonder what buyers are really looking for in an effort to make their businesses as attractive as possible. The answer to this question can seem mysterious when you are on the other side of the bargaining table. So, what are buyers typically thinking about when they make the decision about whether or not to purchase a business? It should come as no surprise that much of this is tied into earnings and stability.
Guarantees of No Surprises
Earnings that are sustainable are very attractive to buyers. After all, it allows them to know what to expect. Buyers can then factor in if they can advance the business in a way in which it would grow faster than the current pace. If not, they at least would have the confidence to know that the business will proceed at the same rate. Of course, no buyer would want to acquire a business only to find that it only had high earnings temporarily due to a one-time contract.
Accuracy of Information
Along the same line of avoiding surprises, buyers will want to verify the information they receive about a business. Anything involving past, present, or future legal issues will be scrutinized along with other issues, such as pending product returns. The due diligence process is when you can expect the buyer to really dig into the details of your business. You can expect that he or she will often do so with the assistance of an attorney and accountant.
Oftentimes, accountants or appraisers add back one-time expenses or non-recurring expenses. Buyers will want to look at the earnings and have proof of expenses that are non-recurring, such as fees for a lawsuit or heavy repairs to a building. Since this process inflates earnings, it can make it difficult for buyers to understand the actual earning potential of a business. Otherwise, those expenses would obviously throw off the true earning potential of the business.
In Closing
These are just a few of the critical considerations made by business buyers when looking at a potential acquisition. There are numerous other considerations that a buyer will make and it is important to be prepared to address those questions and potential concerns a buyer may have up front, or they will quickly lose interest and move on to other potential acquisition opportunities. Put yourself in the shoes of a potential buyer and think about the kinds of assurances you would want before buying a business.
Working with a Business Broker or M&A Advisor can be tremendously beneficial in this regard. These professionals have worked with many buyers in the past, and therefore easily see things from a buyer’s point of view. They will not only be able to help you get prepared up front when buyers begin looking at your business, but easily identify and point out areas of concern that a potential buyer may have in order to keep the journey to closing on track.
Copyright: Business Brokerage Press, Inc.
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No Replacement for Experience
When it comes time to sell your business and sign on the dotted line, you only have one opportunity to get it right. In many cases, business owners have made critical mistakes while attempting to sell their business. This kind of scenario can often occur when an owner trusts a friend or relative to help navigate the process. In some cases, business owners have even been known to try to broker their deals on their own. Let’s take a look at some common errors that have occurred during the process when experienced professionals were not brought in to assist.
Not Prioritizing Confidentiality
We cannot understate the importance of confidentiality. When business owners try to go it alone, they often share valuable information with the wrong people, such as competitors. Or accidentally alert employees, suppliers and customers that the business is up for sale. When confidentiality is breached, unexpected and unfortunate consequences can result, such as employees looking for new work or customers switching over to work with different businesses. If any of these scenarios occur, it can devalue the business or even interfere with a sale going through properly.
Mistakes in Financial Information
If the party assisting you to sell your business lacks experience, he or she may accidentally omit preparing critical paperwork. Additionally, if the financial records are not properly audited, it could negatively impact the numbers. This could lead to lower offers and less interest from prospective buyers.
Failing to Involve Key Parties
Another error that could be caused by inexperience is neglecting to bring key parties into the deal. For example, when a business owner is guided by a layperson or trying to handle everything on his or her own, important people, such as the CFO, might accidentally not be brought into the due diligence process. While an error like this one might not necessarily kill the deal, it could lead to delays and complications.
The bottom line is that when it comes to a large transaction like selling your business, it is time to rely upon trustworthy professionals. There is a long list of protocols and steps that lead to a deal going smoothly. Experienced business brokers and M&A advisors will make sure that all the best practices are followed and that you come out ahead in the end.
Copyright: Business Brokerage Press, Inc.
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The Process for Selling a Business: How to Prepare
Owning a business is a fundamental part of the American Dream. Becoming a business owner lets you take control of your work life and sell products and services you believe in.
But, owning a business is also a lot of work. You may have reached the point where you can’t handle this work anymore. Or, maybe you’ve made enough money that you don’t need your business income anymore.
In either case, you may consider selling your business. Selling a business can relieve you of many responsibilities and free up your lifestyle.
Yet, selling a small business is also a process that requires lots of work. You may not even know how to sell a business yet.
Luckily, you don’t have to go through this alone! Instead, we’ll provide you with this “selling a business checklist” in our guide below. Let’s jump right into it, shall we?
How to Sell a Business: Get a Valuation
The first step in selling a business is to determine its value. So, to begin, find a company that can provide a professional valuation to assess your business’ worth.
This valuation provides you with a means for gauging offers from prospective buyers. This way, you can get an idea of what to expect to net from your sale.
Valuations provide other information as well, such as:
- Business market position
- Financial situation
- Strengths and weaknesses
Several sources can provide a business valuation. You can go to your local accounting firm to receive this information or find specialized brokers. Remember that the valuation company needs the most current national data trends for your industry.
This knowledge ensures this company provides an accurate valuation of your business. Finally, it also helps if they have experience selling businesses like yours.
Prepare Your Books When Selling a Business
Once you get a business valuation, start preparing your financial records. Most buyers for businesses want three years’ worth of financial information. Sometimes, they may want more than this.
So, gather your records and ensure they’re as clear as possible. It’s best to have your statements reviewed or prepared by an accountant, too. An outside professional will usually organize your data in a more accessible way than internally generated methods.
Make sure you gather your tax returns, too. Sometimes, these documents alone suffice for your prospective buyer.
Also, remember that some expenses may not be representative of your business’s profitability. You may have infrequent expenses from the last three years that the buyer should exclude when analyzing your cash flow.
For example, your business may have moved to another location. If so, you may have moving expenses that wouldn’t recur in other years.
But, your business may have nonoperational expenses each year, too. For example, your business may pay for your personal cell phone or automobile lease. Business owners must provide supporting documentation in these cases.
Talk With Your Financial Advisor
In many cases, selling a business brings tax concerns for business owners. Because of this, you may want to consult your tax advisor to plan for your future.
Your tax consultant can help you understand your personal and corporate tax situation in greater detail. From there, you can determine your options when structuring your business bill of sale.
Organize Your Legal Documents
Prospective buyers won’t just want your financial information. They’ll also want to see your legal documents, including:
- Incorporation papers
- Permits
- Licensing agreements
- Leases
- Contracts with customers and vendors
These documents help buyers verify your business dealings and ensure they’re legit. So, make sure you gather them together. Also, check that the documents are current and chronologically ordered.
Determine Your Managerial Succession
Many small business owners take a hands-on approach to running their business. They play a significant part in their day-to-day operations and oversee their progress.
If that describes you, then consider who can replace you. All the paperwork in the world can’t tell you everything about your operation. Personal dynamics and operational methods are often unknown to new buyers.
So, it’s imperative to find somebody that the new owner can turn to for help after you leave. Who fits that description? Who knows your operation better than anybody else and has the judgment to help oversee it?
Make a Good Impression on Buyers
At some point, buyers will visit your shop to see how it runs. When they get there, what will they see?
Will it be an orderly business with streamlined processes? Or, will they see a business in chaos?
Buyers look for a company that runs orderly and well. These operations usually indicate that the shop has a skilled management team overseeing the business. As such, buyers feel more secure in their investments.
Know Why You Want to Sell
Buyers look for a company that runs orderly and well. These operations usually indicate that the shop has a skilled management team overseeing the business. As such, buyers feel more secure in their investments.
This caution usually leads to buyers asking why you want to sell. After all, why would you give up a well-run and profitable business?
So, be prepared to give an answer to that question. Make sure it’s well-articulated and easy for buyers to understand.
Build Your Legal Team
Finally, it’s best for businesses to assemble a legal team they can trust. Look for lawyers and accountants with expertise in mergers and business acquisitions. These people can help you draw a solid contract and business bill of sale.
Also, consider using a business broker or investment banker to represent your business. These professionals can help you through the business selling process from start to finish.
Find a Business Broker To Help You!
Selling a business alone can be challenging. There’s a lot of organization you have to do, and it may be tricky to know how best to do it.
That’s why a business broker can be a tremendous asset to you. Fusion Business Services provides an integrated process to help you understand every aspect of your sale.
We work with you through every step of this progress to ensure you get the best deal possible. If that’s what you need, don’t hesitate! Contact us today to learn more about what we can do for you.
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An Overview of Goodwill in Business Deals
Many business owners don’t understand the concept of goodwill or how to calculate it. When a buyer is willing to pay a premium price for a business, far more than the company’s assets would typically dictate, that is considered goodwill. Any company can benefit from understanding how goodwill is cultivated and increasing it within their operations.
What is Goodwill?
Goodwill can be as simple as your company having an exceptional reputation and a very loyal base of customers. Often highly sought-after technology can be a part of goodwill. In other cases, goodwill can be in the form of IP or desirable domain names. However, as you can imagine, it is difficult to put a specific price on these kinds of benefits.
When a business involving goodwill is sold, it can be very challenging to determine a fair amount for a business, since subjective values are involved. In some cases, it can even be overvalued by the buyer. Your Business Broker or M&A Advisor will take goodwill into account when determining a fair and reasonable company’s valuation.
The Case of Personal Goodwill
In some cases, a company’s goodwill is personal. This is often due to a professional building personal goodwill with customers or clients. Oftentimes this is a relationship built over a period of time. In these cases, the goodwill is not necessarily transferable. The business is associated with a person who is often the founder of the company. You will typically see this kind of situation with dental and doctor’s practices and law offices.
So how does personal goodwill impact the sale of the business? When you sell it might be natural that the buyer will want protection in case the business faces a downturn when the current management departs.
What can work for the buyers and sellers is for the business owner to agree to stay onboard for a designated period of time. This can help ease the transition to the new business owner. In other cases, the buyer and seller arrange an “earn out.” Any lost business is factored at the end of the year, and then this percentage is subtracted from the amount owed to the seller. In some cases, funds are placed in escrow and adjustments are made depending on the performance of the business.
If you are buying or selling a business that involves personal goodwill, your situation may be different from that of the majority of businesses. However, a Business Broker or M&A Advisor can guide you through the process and ensure that all parties are satisfied.
Copyright: Business Brokerage Press, Inc.
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