As an intermediary, I have many conversations with business owners about how much their business is worth. As these conversations progress, owners realize that it’s not how much they make, it’s how much they can keep that truly matters.
The COVID 19 Era has begun. In addition to lives lost, there’s an economic toll that has yet to be determined at the time this content is being written. With small businesses on life support, these are scary times for business owners and for the intermediaries helping owners navigate through them. So how has COVID 19 affected business transactions?
As a business intermediary helping owners determine the “Most Probable Sales Price,” or MPSP of their businesses here in the Triangle, I hear a common question:
“That value makes sense, but what about all my stuff? Can I get paid for that too?”
The answer is rarely what the business owner wants to hear, but there’s a sound reason for it, and understanding how businesses are priced can help an owner with decisions on how to allocate resources for assets; especially if they are planning to sell in the near future.
In this article, we’ll explore the market approach for small businesses and what value the assets carry…
Doing deals can be expensive. A lot of entrepreneurs want to save money by not hiring an advisor or they don’t know when they should make the investment on an advisor. It’s important to understand the roles of the broker and other advisors, especially legal counsel, and to know when to bring in a professional. Here are some milestones in a deal, and how to know when to hire a business advisor.
One of the greatest risks any buyer faces is what will happen to the business’ best customers post-sale. Will the top customers celebrate the founder’s great accomplishment or maybe decide it’s a good opportunity to negotiate better pricing or payment terms with the new owner? Or worse yet, will they be spooked by the new owners and find an alternative vendor?
Astute buyers measure this risk quickly. Typically, one of the first questions experienced buyers ask the business broker is about the presence or lack of a customer concentration.
For the business owner considering the sale of his business in the near future, having a clear understanding if a customer concentration exists is vitally important. In fact, the lack of a customer concentration is a great selling point.
Depending on the circumstances and objective of the owner, the value of a business can vary considerably. For instance, upon sale to unrelated party, an owner would expect to receive the maximum purchase price for their business the unrelated party is willing to pay. However, that same sale to a family member or employee may need to be structured so the cash flow of the business can support the purchase price.
For a closely held business, owners generally have little idea about the value of their business, or whether their business is generating an adequate return on investment, and what drives its value.
A Broker’s Opinion of Value, or BOV, can help an owner determine what the business would sell for on the open market. This, in relation to an owner’s “pain” level, are often enough to make a decision if they are ready to sell.
The method chosen to transfer ownership of a business for sale is one of the most important factors to consider as a business owner. And the reason for its importance is related to the wide differences in the amount of cash received (net of taxes) by the business owner across the various methods of transfer or sale. An ESOP or Employee Stock Ownership Plan is one method of ownership transfer or sale many business owners consider when they decide it’s time to retire. That said, let’s explore the ESOP as a potential method of transfer or sale from both the business owner’s and employees’ perspectives.
When a business owner begins to negotiate the sale of his or her business with buyers for the first time, he or she will inevitably face a difference between the buyer’s offer price and the desired selling price. It’s at this point when a lively debate between the parties will occur over the underlying reasons for the business’s asking price being what it is. At this time a seller will be well-served if able to offer justification for an increased business valuation and a higher business selling price.
As businesses grow and develop, so do their intellectual property (IP) assets. And if these businesses are engaging in proper IP management, they are filing trademark and patent applications to protect their IP. However, because of the public nature of both trademark and patent prosecutions, one may get an inkling of their competitors’ business plans if they monitor these application filings. Though not a perfect way to predict the exact nature of your competitors’ future offerings, keeping track of IP filings can be a guide to where your competitors are moving.
The valuation multiple formulas available to compute the value of a business for sale are numerous and can be confusing to many small business owners. In fact, many professionals can be similarly confused by the various multiple formulas currently in use.
My business partner, the author Jack Beauregard, and I recently had breakfast with Lorraine McGregor from Vancouver, BC Canada. Lorraine is the author of books on Exit Planning and Entrepreneurship, as well as an experienced business consultant. We were all discussing why so many business owners were delaying (the inevitable) transition planning from their businesses.
Business Valuation Experts come in many forms, and for a business owner it can be very difficult understanding the various designations. More importantly, when the business owner is in need of a valuation, understanding exactly what type of expertise is necessary and ultimately who to hire can become a daunting task.
To sell or not to sell, that is the question many business owners ask themselves at least once during their tenure as business owners. Sometimes, the decision to sell is easy if the owner is ready to retire or has decided to pursue a new career or business opportunity. However, in many cases, business owners struggle with this critical decision. Fortunately there are several steps you can take to make an informed and stress-free decision on whether to sell your business now, later, or not at all. In all cases seek the advice of several third party professionals such as a Business Attorney, Certified Public Accountant (CPA), Business Appraiser and/or Broker, and a Financial Advisor as well as consultants in your industry.
One of the many questions asked by entrepreneurs as they plan for the sale of their business is related to the Adjusted EBITDA definition.
When an asset has a grossly inflated price, it is by definition an asset bubble. Does this apply to many small businesses in the US? Probably yes, in my opinion. Most small businesses have a balance sheet listing some assets; therefore they are subject to being part of a bubble.
Most individuals who consider themselves entrepreneurs believe they must start their own business to earn the title. However, what some do not realize is that the entrepreneurial spirit can be fulfilled in a variety of ways, not the least of which is purchasing an existing business. The following is a list of advantages for buying a business over starting one from scratch.
If a customer’s total revenue for the year represents 8% or more of all revenue for the same year, you have a customer concentration risk.
The reasons for selling a business are many and varied; in the end, however, the desired result is the same – money. So how does one go about maximizing profit when selling a business?
If you’ve grown a valuable business, there is no doubt your employees are a big part of your success. You also know that hiring, training, and managing a great team of productive employees is a difficult task. And keeping your best employees is yet another accomplishment! But the painful truth is your competition would be very pleased to hire away your best employees.
Most entrepreneurs build a business with a view to an eventual profitable exit. Most probably have lifestyle aspirations in mind that imply a certain amount of money to be realized from a sale. Whether they are looking at an exit now – or a decade from now – they need more than the subjective opinion of friends and acquaintances as to how much their business is worth.
Many business owners are under the wrong impression that their business debt will disappear when their business is sold. In some cases, the debt is absorbed or is assumed by the buyer. But usually this is not the case.
In many cases, the Entrepreneur finds it difficult to know who they should target as a potential buyer for their business. At first glance, any buyer with a checkbook may be attractive. In practice finding the right buyer when selling a business is both an art and a science.
Management Buyouts, or MBOS, can sometimes have a negative connotation. Maybe that’s because it sounds like the management team is getting “taken out”. On the contrary, it is the exact opposite. A Management Buyout is a fancy acronym for when the current managers buy controlling interest of a company from its owners. That’s a good thing for management!
Often, business owners ask me one of those “quick questions” – what can I do to maximize the sale price of my business? The answer? Not as simple as you may think. But there are 4 factors that can increase the value of your sale price.
EBIT is an acronym for Earnings Before Interest and Taxes. This is a term Bankers often use as a measure of a business’s earnings from operations. The EBIT reveals operating profitability without non-recurring or unusual income or expenses.
This is a story with an unhappy ending. I heard this story from employees who worked for a company many years ago. I knew the company well and as far as I know, this is the truth.
A copyright protects the particular ways by which people expressed themselves. A copyright gives an owner the exclusive legal right to reproduce, publish, sell, or distribute an original creative work.
As I meet with entrepreneurs, I’m often asked the same question: “When is the best time for me to sell my business?” The answer to this question is not the same for every business owner, for many reasons.
EBITDA is an acronym for Earnings Before Interest Taxes Depreciation and Amortization. EBITDA is often used as a measure of a business’s cash flow. Also it is used frequently in many business valuation formulas, depending on the business’s specific industry.
The best solution to a problem lies in uncovering what the root cause of the problem really is. So often, this is the case when an entrepreneur is struggling with profitability in their business. Over the past few posts, we have discussed the concepts of how a minimum order policy and Pareto’s Principle applied to the customer/client base can be very powerful to help an entrepreneur improve the value of their business.
Proprietary information such as customer lists and recipes are intellectual property. However they are not formally protected in the same way as are trademarks, copyrights or patents. These and other types of confidential information can only be protected if they are treated as trade secrets.
One of the most crucial, yet subjective, aspects of any business valuation is determining the specific company risk premium of the business being appraised. The specific company risk premium varies with each company and is intended to be an adjustment to reflect a variety of circumstances inherent in the company and its industry.
Anyone who owns a family business is intimately familiar with the blood, sweat, and tears associated with building and then keeping the business viable. Nevertheless, it is not unusual for the business entrepreneur to postpone consideration of various issues involved in transferring the business to the next generation, including determining the value of the business.
Your worst nightmare comes true! You get an email on Friday afternoon from your largest customer indicating that they are changing suppliers for “strategic reasons.” They represent 20% of your sales revenue and 35% of your profits.
It is a unique pleasure to find two equal partners or shareholders acting in harmony over selling a business. Unfortunately, when I say “unique”, I mean rarely ever. Please understand, it is not as if this never happens. It is just so unusual, that when faced with the situation, I find myself warning both parties before they proceed to sell their business.
When considering your business valuation and business risks in the hopes of selling that business, there are many factors to consider. One important factor to understand is the application of valuation discounts. The valuation of a controlling interest versus a minority interest within a privately held business can have different values, depending on the circumstance.
The various types of valuation reports produced by a business appraiser can be confusing to an entrepreneur, especially when the appraiser belongs to more than one valuation association. Under most appraisal standards, a business appraiser can produce two types of reports: a detailed appraisal report or a calculation report.
At some point in time, every business owner will leave their business (voluntarily or involuntarily). Through proper planning, an owner should expect to achieve their desired goals. Statistics show that the value of an owner’s business accounts for over 90% of their personal wealth. However, more than 75% of all business owners do not have a formal transition plan in place.