Valuation

Advice To Help Get Your Business Ready To Sell

You have finally decided that the time is right to sell your business.  The market is still strong, banks are lending, and you have a compelling reason to sell.  Now what?  You need to get your business in shape prior to listing it for sale.  Here are some pointers that can help get you ready.

1. Start putting your team together. Selling a business is complex even in the best of times, and even more when you are doing so confidentially, as you don’t want your employees, customers, etc. knowing for a number of reasons.  It is also time consuming – it could take a year or more to get to the closing table.  For these and a number of other reasons, it is important that you seek the services of the professionals that will compose your deal team.  At a minimum you will need a business broker, an accountant, and an attorney.  These team members will help you with a number of things, such as, determining a realistic sales price and the net proceeds of the sale, managing prospective buyers and the overall process, putting a deal together, and taking the lead on negotiating on your behalf.
2. Be prepared to discuss your reason for selling. Somewhere early in the process you need to be prepared for the prospective buyer to ask you why you are selling your business.  Buyers will want to know what your motivations are for selling, what you plan on doing after you sell, and most importantly to determine if they are getting into a potential problem if they were to buy your business.  Consider putting together a list of attributes that will make the business attractive to buyers.  You need to be honest, but you also need to key in on the positives.
3. Get your financials in order. Prospective buyers will want to see financial statements, tax returns, budgets, accounts receivable aging reports, a copy of your lease, etc.  These are just a snap shot of what you will be asked to provide during the due diligence process.  You also need to put together a list of the tangible and intangible assets that will transfer as part of the sale.  If you don’t have accurate financial records, you need to get this taken care of with your accountant prior to listing your business for sale.
4. Don’t ignore the appearance of your business. Make sure that the fixed assets and the facility interior and exterior are in good shape prior to listing your business for sale.
   1. Fix, replace, or get rid of broken equipment
   2. If you haven’t taken a physical inventory, you need to do so prior to listing. Get rid of excess and/or dead inventory.
   3. If the facility is looking dated and worn, consider painting, replacing floors, refreshing the outdoor appearance, etc.
5. Start gathering and putting together information. Your team will need a great deal of information in order to package your business in preparation for presenting it to prospective buyers.  In addition to the financials and the lease, they are going to need a great deal of information from all facets of your business.  Although this may be painful, it will be well worth the effort in that it will help your team put together a detailed presentation.  More importantly, much of this information will also be what a prospective buyer will be asking for during their due diligence.

Getting your business ready to sell takes a great deal of time, especially if you don’t have your books and records in order.  It isn’t unusual for sellers to take several months or more to fully prepare their business for sale.  If you aren’t as ready as you would like to be, don’t let this get you down and keep you from getting started.  This way of thinking is very neatly personified in a circa 1562 adage of John Trusler, a compiler of proverbs, who is noted to have stated “no time like the present, a thousand unforeseen circumstances may interrupt you at a future time”.

About Us:  VR Business Brokers is one of the world’s largest and most experienced brokerage firms specializing in helping people with the sale and purchase of businesses.  We go the extra mile every day to assist all parties during the complex business sales process. We know that each and every business is unique, and that’s why we go through a meticulous process to find and unlock the true value of each business.  More information is available at www.BusinessBrokersofTampaBay.com.

Determining the Value of a Business – Get it Right from the Beginning

If you have ever watched the popular MSNBC show The Shark Tank, you have witnessed the Sharks grilling the participants on the valuations that they have placed on their businesses.  In the real world of business transfers/sales, business owners can expect the same type of scrutiny.  In a previous post we wrote about four questions that all Sellers must be prepared to answer, with one of them being where in the heck did you come up with that price?

Much to the chagrin of many business owners, businesses are valued on how much revenue they generate and not on the business’ potential, longevity, intangible assets, etc.  The type of revenue used in the business valuation calculation can vary from annual sales, gross profit, net income, and others.  We believe that for main street businesses (those with a value of $2M or less), the most reliable revenue figure to use is Discretionary Earnings (DE)[1].  Once this figure is calculated, we determine the value by identifying multiples of the selected revenue figures by accessing various sold comparison data bases and applying the multiple to the revenue figure.

This multiple is a function of a number of factors, which include the industry, the size of the business (top line sales, DE, etc.), risk, owner reliance, customer/supplier concentration issues, etc.  Another thing to keep in mind is that the Buyer is also going to gauge their decision making on whether or not the DE will pay them a reasonable salary to support them and their family, pay principle and interest on debt service, and provide a reasonable return on their down payment.  All of these, and other items, will contribute to the pricing.  Even after all of this work and effort, a company is only worth what someone is willing to pay for it.

In most cases, when businesses are not priced within this framework, buyers will seldom give the business a second look and the business will not sell.  This is supported by a recent International Business Brokers Association survey where brokers stated that one of the top reason’s businesses did not sell was due to unrealistic price expectations of sellers.

Since your business is likely the most valuable asset in your portfolio, and the sale of this asset will determine your future financial independence, don’t take the chance of going to market without knowing what your business is REALLY worth.  Your future financial well-being will depend on it.

[1]  https://www.ibba.org/resource-center/glossary/ The earnings of a business enterprise prior to the following items: income taxes, non-operating income and expenses, nonrecurring income and expenses, depreciation and amortization, interest expense or income, one owner’s entire compensation, including benefits and any non-business or personal expenses paid by the business. Seller’s Discretionary Earnings (SDE)and Seller’s Discretionary Cash Flow (SDCF) and Adjusted Net are other terms used.

One of the Most Active Business Brokerage Firms in Florida VR Business Sales has been the leader in the business brokerage industry for over forty years and consists of approximately 50 independently owned and operated offices worldwide. VR Business Sales located in Tampa/Apollo Beach was founded in 2012 and offers VR’s exceptional brokerage services to the Central Florida market. We represent a wide variety of business owners operating within a wide range of industry segments. Our office and intermediaries consistently rank within the Top 10 in the VR network.  Call us at 813-260-3127 to arrange a no cost and no obligation meeting.

Cash Flow and Price of Business Will Determine Likelihood of Sale.

Cash flow is king for buyers when looking to acquire a business, as this purchase may very likely be the most important and expensive purchase in their life.  Most of the serious buyers we deal with realize this and are able to come up with the cash and/or financing required for the purchase.  What many of them don’t realize is that they will need a significant amount of cash flow after the purchase to do three things; 1) to pay themselves a living wage, 2) to retire the principle and interest on any debt they incur in the purchase of the business, and finally 3) to provide them with a return on their down payment (pay themselves back) and/or to have money left over to put back into the business (working capital).  So, if you are in the market to buy a business sometime in the future, please keep this in mind.  On the other hand, if you are a business owner who is looking to sell sometime in the future, keep this in mind as well when it comes time to determine the sales price of your business.  If the cash flow of the business can’t support the three things we mentioned above, you may want to reconsider your pricing, or be prepared to negotiate on the terms of the deal in an effort to make the deal work for a buyer.

Can You Afford To Sell Your Business?

One of the most valuable services we provide to prospective sellers is a Broker’s Opinion of Value (BOV), and also helping these Sellers understand what they will likely net from the sale of their business.  In many instances, our BOV does not meet the expectations of the Seller for what could be a myriad of reasons.  Sometimes the Seller will go back to the proverbial drawing board to try and figure out what they need to do in order to make their business more valuable.  In other instances, they may suggest that we need to get them a higher price for their business that is more in line with their initial expectations.

As tempting as it may be to take the Seller on as a customer, the fact of the matter is that the business is only worth what it will bring on the open market and what a Buyer is willing to pay.  At the end of the day, we cannot make a business worth more than the open market will pay, no matter how much the seller needs to walk away with a higher net.

This all to familiar picture we have painted is often the result of unrealistic expectations, lack of proper exit planning, short sighted behavior, and other countless possibilities.  Some of the ways that we try to work with Sellers to increase the value of their businesses, and ultimately how much they will net, include the following recommendations:

• Clean up the business’ books and records, if not already in that state.
• Have a periodic valuation done on the business.
• Determine how much money you would walk away with once you have deducted estimated taxes and fees.
• Determine how much money you will need post sale to maintain the lifestyle of your choosing. Will you have enough at this price?
• Get out of the tax avoidance mind set by limiting the profits of the business.
• Minimize the personal expenses that are paid through the business and consider how you will replace these Seller’s Perks post sale.
• Work to reduce the Seller’s involvement in the business.
• Implement documented policies and procedures.

Like most Sellers, when the day finally comes to sell your business, you are going to want the highest possible price.  You have spent years building it and likely have a value in mind based on a number of factors.  Keep in mind that the marketplace will determine the value of your business, and the better prepared you are before that fateful day comes, the more likely you will be able to afford to sell your business.

If you are thinking about selling your business, don’t wait too long to start preparing yourself and your business.  If you would like to discuss the business sales process, or have any other related questions, feel free to give us a call to set up a complimentary no cost and no obligation consultation.

“One of the Most Active Business Brokerage Firms in Florida VR Business Sales has been the leader in the business brokerage industry for over thirty-five years and consists of approximately 50 independently owned and operated offices worldwide. VR Business Sales located in Tampa/Apollo Beach was founded in 2012 and offers VR’s exceptional brokerage services to the Central Florida market. We represent a wide variety of business owners operating within a wide range of industry segments. Our office consistently ranks within the Top 10 offices in the VR network, and most recently in 2016 we were the #3 office in commissions earned and had the #1 office owner and #3 sales associate; and in 2017 we had the #10 office owner. Call us at 813-260-3127 to arrange a meeting.”

2018 Business Sales Observations – Pitfalls to Try and Avoid

Besides spending the holidays in keeping with our family traditions, this is also a time where business owners typically take time to reflect on their past year and set goals for the upcoming year.  We do these things to improve our businesses, which will eventually help when it comes time to sell the business.  Besides taking part in these same activities, we also took some time to reflect on some of the things that we witnessed business owners doing over the past year that you may want to avoid doing yourself.  We share these high-level observations, over four broad categories, in the hopes that you might avoid doing the same, or at least consider the consequences if you choose to go down any of these same paths.  These observations (all from the perspective of a business owner) include:

• Poor Books and Records
  • Co-mingling of their personal life and business finances in bank account(s), credit card(s), etc., which makes it difficult to represent the true earnings and discretionary earnings / cash flow of the business.
  • Not reporting cash and having an expectation to use this unreported cash as part of a valuation. While dealing with this issue early in my career, my first broker and mentor told a prospective Seller that he couldn’t steal the money twice.
  • Not having an accountant/CPA and no accountant/CPA prepared financials.
• Unrealistic Seller Expectations
  • Sales price. Too high is bad and too low is even worse.  If it is too high, buyers won’t take it seriously and there will be little interest.  If too low, the Seller will more than likely leave money on the table.  Best advice we can provide is to get a valuation done if you are considering selling your business.
  • Demanding all cash. In a perfect world, the business will be pre-qualified for SBA lending, and the seller will get all/or most of their cash at closing.  In cases where this is not feasible, if the seller is serious about selling, they will have to be willing to serve as the bank and hold a seller’s note.
  • Timeframe to sell business, which is dependent upon a myriad of factors. Our data shows that the average time to sell a business is between 7 to 9 months from signing a listing agreement.  We have sold businesses in less than two months and some have taken over two years.
• Leases
  • Not renewing a lease, or having options when it comes time to sell, which puts the landlord in a position of power and brings uncertainty and an added element of risk to the buyer’s mind. Month to month leases may make the seller’s feel comfortable, but are terrible when it comes time to sell.
  • Not reading the lease, or being aware of what they have signed – are you, the business owner, a personal guarantor, which may require them to stay tied to the lease after assignment; landlord’s ability to withhold assignment; assignment fees, etc.
  • Is the seller defaulting in anyway on the terms of the lease – reason for landlord not to assign.
• Poor Inventory Management
  • Not properly tracking/reporting, and in one case purposely manipulating the figure to artificially reduce their income.
  • No idea of how much inventory on hand. In one instance we had a seller that had never done a physical inventory count.
  • Too much inventory, which ties up cash and brings with it other associated expenses in such areas as interest if financed, storing, handling, insurance, etc.

If you would like to discuss the business sales process, or have any other related questions, feel free to give us a call to set up a complimentary no cost and no obligation consultation.  Wishing you all a very Merry Christmas and a Happy New Year.

“One of the Most Active Business Brokerage Firms in Florida VR Business Sales has been the leader in the business brokerage industry for over thirty-five years and consists of approximately 50 independently owned and operated offices worldwide. VR Business Sales located in Tampa/Apollo Beach was founded in 2012 and offers VR’s exceptional brokerage services to the Central Florida market. We represent a wide variety of business owners operating within a wide range of industry segments. Our office consistently ranks within the Top 10 offices in the VR network, and most recently in 2016 we were the #3 office in commissions earned and had the #1 office owner and #3 sales associate; and in 2017 we had the #10 office owner. Call us at 813-260-3127 to arrange a meeting.”