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(2) The ability of a business to generate earnings (Often times it is necessary
to compare the true earning power of a business by 'adjusting' the income of the
business for discretionary expenses of the Seller ... we call this revised or
recasted calculation the “Adjusted Profit” or “Seller Discretionary Cash Flow”
or SDCF); and (3) Demand (Certain types of businesses, such as manufacturing
companies, will usually command a larger purchase price than retail firms with
similar earnings).
SHOULD IT BE A STOCK OR ASSET SALE?
Although each transaction must be reviewed on a case by case basis, most
Purchasers acquire the assets of an existing company, rather than the stock of
the corporation being sold for tax purposes and to avoid assuming unknown
liabilities of the selling corporation.
SHOULD YOU CONSULT AN ATTORNEY AND/OR ACCOUNTANT WHEN BUYING A BUSINESS?
Yes, buying a business can be a complex transaction. We advise all Purchasers
and Sellers to consult with legal and tax professionals who have transaction
experience. Usually professional advisors do not get called in until the
Purchaser selects a business and is reasonably certain that the Seller will sell
on terms acceptable to the Purchaser. Attorneys are used to review contracts and
prepare closing documents with appropriate protection for the parties involved.
Accountants are consulted for tax advice and verification of existing financial
data. In selecting an attorney and accountant, try to retain an advisor with
prior experience in business transfers. Be prepared to listen to their opinion
but be prepared to make the final decision. They won’t ever advocate to buy a
business.
IS IT BETTER TO BUY AN EXISTING BUSINESS OR TO START A BUSINESS?
There are many advantages to investing in an existing business, but the reduced
risk of failing is usually the most compelling. An existing business will have
an established track record and customer base already in place. This existing
business base provides immediate cash flow and improves the probability of
obtaining acquisition financing. Buyers typically want cash flow now!
WHY SHOULD YOU CONSULT A BUSINESS BROKER?
Unlike selling a house, when a Seller elects to sell a business, the Seller, to
preserve confidentiality, typically does not place a sign on the property or
list the business in a multiple listing directory. Consequently, Purchasers may
have difficulty locating businesses that are for sale. Our office represents
numerous businesses of different types and sizes. This selection, appropriate
financial and operational data in our files, and our considerable experience in
negotiating transactions can save Purchasers substantial time and effort in
locating a suitable business. Additionally, as a result of the volume of
transactions that we complete, we have financing contacts in place to provide
the Purchaser options for obtaining the most competitive financing package.
Sellers FAQ
Thinking about selling your company? More and more owners of small and
medium sized businesses are considering the advantages of selling their
businesses these days. Of the more than one million businesses that will change
hands this year, most will involve privately held companies selling for $100,000
to $50,000,000. Yet, until business owners experience a merger or acquisition,
few will know what to expect or how to proceed. In the lives of entrepreneurs,
few events are more emotional -or significant - than selling their business.
Entrepreneurs should always be thinking about the possibility of selling. The
smart business owner should start planning for a sale and create a file labeled
'Sale of the Business' years before they have any intention of selling. Set
forth below are some questions frequently asked by existing business owners.
WHEN IS THE BEST TIME TO SELL?
The optimum time to sell is when your business is doing its best, not before you
are forced to do so by health or financial reasons. This places you in the
strongest negotiating position. You should actively start the process
approximately two years before you want to complete the transaction by
contacting an experienced business broker who can give you recommendations on
how to maximize the value and marketability of your business. It usually takes
at least six to twelve months to sell a business, and the buyer may ask you to
stay on for a transition period.
HOW DO YOU DETERMINE HOW MUCH A COMPANY IS WORTH?
There is no simple method. But to approximate the value of your business, you
should consider both its assets and earning power. The appraised, or fair market
value, of assets provides the minimum price you can expect. Earning power is a
function of annual earnings, with expenses due to private ownership, added back
to profits. This 'Adjusted Profit' is divided by the appropriate capitalization
rate (usually in the 20% to 50% range.) Most Purchasers and Lenders place
extensive weight on the company's ability to generate earnings.
HOW DO YOU GET THE BEST PRICE AND FIND THE RIGHT PURCHASER?
To maximize your price, you need a steady record of profits, hard assets on your
balance sheet, a proprietary product line or a strong market position, and
backup management that can run the business in your absence. Good accounting
records are one of the most critical tools in maximizing value. Most offers
don't appear out of the blue ... they must be solicited. Discretion and
confidentiality are usually crucial. Key employees, customers, and suppliers
have been known to vanish if a company's future seems in doubt. Employees and
competitors usually are the worst buyers for a business. An experienced business
broker will know how to confidentially market your business for you.
SHOULD YOU SEEK THE ASSISTANCE OF A BUSINESS BROKER?
Selling a company can be a lengthy and time-consuming process. Generally, the
best thing an owner can do is manage his business profitably while engaging an
experienced intermediary to prepare a presentation package, advertise and market
the business to provide national and international exposure, screen prospective
Purchasers, negotiate and evaluate offers, and perform the myriad of other
necessary tasks associated with the selling and closing process. In addition, an
outside party brings objectivity and can act as a buffer between the buyer and
you. Confidentiality is critical to most sellers and it is extremely difficult
to maintain confidentiality without the use of an experienced business broker.
The process is not as easy as it appears and having a proven business broker
increases the odds of successfully crossing the finish line.
---How can I get more information – I still have questions?
Contact Dwight Jones by calling him at
858-212-1944 or
send an e-mail to
Dwight@SanDiegoBusinessBroker.com. |
