What is the Market Value of your Business?

One of the truly confusing aspects for a business owner trying to sell on his or her own is that of what value to place on the business. Such thoughts as “it is what I need to retire on” or “it’s what I put into it” are not methods for determining what a business is worth on the market. 

Too many business owners also concentrate on gross sales without proper knowledge of the basic operating expenses to profit on their business (cash flow). Cash flow is the true profit of the business and the asking price should be a variable on cash flow. Cash Flow – not gross sales – determines the profitability of the business.  

What is Cash Flow? 
Cash flow is profit before taxes. It is what the owner is truly making. Cash Flow is determined by taking the Net Profit or Loss from the tax returns then “adding back” to the Net Profit or Loss any non-essential, non-business related or paper expenses (amortization, depreciation and interest). There are additional “add backs” like one-time expenses or payroll expenses on an employee no longer with the business – just to name a couple. 
For example – we have a fictitious business named Widgets Inc. In looking at their latest tax return we see that it has a Net Profit (bottom line) = $68,787. 
Automatic “add backs” to profit from the tax returns… 

1. $6,424 Depreciation expense
2. $3,178 Amortization expense
3. $1 674 Interest expense

 Discretionary “add backs” to profit from the tax returns… 

1. $12,676 expense for “insurance” was all personal on the owner and wife
2. $18,900 expense was a one-time expense for redesigning the interior
3. $5,323 expense was for the owner’s personal vehicle not made part of the sale not needed to operate the business.
4. $4,568 expense was for his yearly dues at the country club – obviously not needed to operate the business.

 So in determining the cash flow…
* Take the Net Profit = $68,787
* then “add back” 1-3 above (cumulative $11,276)
* then “add back” A-D above (cumulative $41,467)
_______________________________
TOTAL (Cash Flow) = $121,530

So while the tax return shows a $68,787 net profit – the true profit or CASH FLOW was $121,530. Some businesses will show a loss on their tax returns but a good and positive cash flow.  

The actual market value of the business should be determined by using a multiplier of the cash flow + the assets. 

If you read terms like EBIT or EBITA and don’t understand it. Don’t panic. Here is a simplified explanation… 

EBIT (Earnings Before Interest and Taxes) – Cash Flow Above less Interest 

EBITA (Earnings Before Interest, Taxes and Amortization) – Cash Flow Above less Interest & Amortization 

The EBIT for Widgets Inc above would be $119,856 (cash flow less the $1,674 Interest Expense) 

The EBITA for same would be $116,678 (cash flow less the $1,674 Interest Expense & $3,178 Amortization Expense) 

One of the main problems of owners selling their business on their own is that they grossly undervalue their business. This results in far less proceeds from the sale than what they could have gotten by using a professional to assist them.  

These leads back to qualified buyers needing financing. The comprehensive cash flow analysis to market value is the primary method used by the acquisition lenders to fund the buyers to help a deal gets closed.  

There are also Third Party Valuation options to get a detailed value on your business. These valuations can be quite expensive but do provide the most concrete “book” of your business market value. 

IMPROPER MARKET VALUE METHODS WILL GET YOU LESS MONEY 

A good business broker WILL ALWAYS provide you with a detailed analysis of how they priced your business for sale.

If getting the most value for your business is important to you then us for a confidential NO OBLIGATION meeting. Contact River City Business Alliance @ (817) 710-5893

How to find a good Business Broker?

It is very important that you thoroughly interview your business broker before signing an agreement with him or her.

10 Recommended Interview questions to business brokers…

1. How does the business broker protect confidentiality and can they demonstrate the confidentiality processes? They should have all written materials including the confidentiality documents to leave with you for review.

2. How does the business broker qualify buyers and can they demonstrate it? They should have all written materials including the confidentiality documents to leave with you for review.

3. What types and how many lending sources does the business broker have that are readily available to finance the buyers? They should have multiple levels of lending sources and should be able to name a couple of them. They should also have the ability to pre-qualify your business for financing.

4. Is the business broker fully trained, certified and supported by a reputable source and can they verify it? This would include a contact person to verify it.

5. Is the business broker willing to leave you full disclosure materials on their entire process and philosophy? They should have all written materials including the buyer and seller agreements to leave with you for review.

6. How diversified is the business broker as far as networking affiliations to find qualified buyers for the businesses for sale. They should be able to list at least a half a dozen affiliations and networking sources.

7. How many listing does the business brokers and their agents take. If it is more than 10-12 listings per broker or agent then how could they possibly give your business for sale the time and resources it needs.

8. Ask the business broker who they work for – you or the buyer. This should always be YOU unless dual-agency is a requirement.

9. Are the business brokers willing to co-broker. if NOT then you are not dealing with a reputable business broker.

10. How does the business broker get paid? At closing – never before – unless you agreed to a legal retainer to be represented.

If a business broker requests or does any of the following – it could be a warning sign to WALK AWAY!

1. Wants a fee to do a market value analysis – the exception being if you elect to have a Third Party Valuation done – but verify who the Third Party Valuation provider is. Choosing to have a Third Party Valuation done should always be an option NOT a requirement.

3. Requires you to pay for a Third Party Valuation to take the listing – this should never be required. This is an unethical approach by business brokers to generate an immediate income stream regardless of whether they take an agreement to sell your business. 

4. Discourages you from talking to your attorney or accountant – this happens too often and is done by business brokers with something to hide – a good broker should encourage you to talk to your attorney and accountant AND be willing to meet with them upon your request. 

5. Requires you to agree to hold a note (seller financing) to take the listing – this should be your decision and this type of activity is generally associated with brokers who feel the only way to sell a business is with owner financing – not true – they do not have the financing sources to finance buyers.

If you feel uncomfortable or you feel pressured then walk away. Remember that a business broker should work for you NOT vice versa.

 If you are looking for a business broker who will represent your best interests then contact River City Business Alliance at (817) 710-5893 for a confidential NO OBLIGATION meeting.

What is a Seller Representative?

A business broker earns their fee through expertise, hard work, networking and sales and ultimately are experts at getting you and your business to close.

There are terms and stipulations in an agreement that you should understand before engaging with a Business Broker.

A. The agreement normal length of listing agreements range between 9-12 months.

B. An exclusive agreement provides that the business broker under contract is the only business broker authorized to sell your business for the time period allotted. A business owner under Non-Exclusive agreements opens his or herself up for litigation should two different brokers work the same buyer – assuming both brokers have followed proper disclosure processes.

C. The business broker’s fee is NOT negotiable under typical listing agreements. BEWARE of the broker who offers to negotiate their fee – this type of broker may lack the confidence and drive to sell your business.

BEFORE agreeing to this fee – make sure that the broker has outlined for you exactly what they will be doing for you and should include…

1. Determination of a Market Value for Listing

2. The listing

3. Buyer Marketing

4. Qualify Buyers

5. Get Qualified Buyers under Confidentiality

6. Full Disclosure to Qualified Buyers

7. The Tour with the Qualified Buyer the Business Broker and You

8. The Business Financial Review to the Qualified Buyer

9. Due Diligence - Getting Updated Info for Qualified Buyer

10. The Offer

11. Offer Negotiations

12. Accepted Offer

13. Due Diligence Making Sure All Contingencies Are Met

14. Due Diligence Making Sure Financing Is In Place

15. Other Due Diligence Making like Lease or Real Estate

15. The Closing and Dispersal of Funds

Good business brokers are a trained intermediaries experienced in the confidential sale of businesses for sale to qualified buyers. They usually work for and are compensated by the seller though some brokers do represent the buyer.

The benefits to a business owner using a good business broker…

1. Protect Confidentiality at all times

2. Qualified Buyer Processes

3. Financing Buyers through SBA acquisition lenders

4. Placing top market value on the business

5. Continuously targeting and finding new qualified buyers

6. Strategic process to getting offers

7. Strategic process to getting to close

Hiring a good business broker is the most important thing you can do in selling your business. Like all other businesses, there are good and bad business brokers. You should feel comfortable with who they are and be comfortable with how they have represented themselves. 

A good business broker represents the seller from buyer qualification till the closing. The business owner can run his or her business while the business broker manages the entire sales process.

A good business broker is like a sports referee who does a great job – nobody knows he or she is there. The same can be said for a good business broker – they work in the shadows and nobody knows that the business is for sale or sold.

-NAABB

Broker Service Network

Business brokers are needed to protect the integrity of a business for sale transaction. Confidentiality is the KEY COMPONENT. A good business broker not only finds and brings in qualified buyers but he or she is also an expert at taking the process from offer to closing.

If you are looking for a business broker who will represent your best interests then contact River City Business Alliance at (817) 710-5893 for a confidential NO OBLIGATION meeting.

Preparing Your Business For Sale

Deciding to sell your business is an emotional decision. Once you think about selling then it is time to make the move – assuming all decision makers are on board with this decision. Once you decide that you want to sell then make the move. A NFL Hall Of Fame Coach once said that “once a player thinks about retiring then he has already retired.” This statement by the former Head Coach and General Manager applies to business owners as well. Once you think about selling then you are already making an emotional move toward selling.

The first area to understand is that books and records are important. A business needs to be able to justify a price through tax returns, equipment values and inventory values. A pure “cash business” with no substantiating data is very difficult to sell. But in these “cash business” situations where the actual cash flow and declared cash flow are different, there are still ways to prove the entire cash flow through a second “book” or receipts.

The second area to understand is that you should keep the business running as is and NEVER tell anyone that you are selling.  Any hint or leak that you are selling could be catastrophic to the business and the businesses’ future. Employees and customers are very good at noticing changes that may indicate a business is for sale. This will have a devastating result on the business.
Once the decision has been made to sell, you have to prepare various facets of your business before taking the step toward selling.

Here is a general list that you need to prepare…
1. Up to 3 years of tax returns – including P&L statements if available
2. Equipment list & value of equipment at replacement cost
3. Value of inventory at your cost (not retail)
4. Value of real property (if included in the sale)
5. Copy of the lease if business is on leased real property

Here is what you DO NOT want to do…
1. Tell anyone that you are going to sell – confidentiality is of utmost importance
2. Change the business models or daily operations
3. Take cash out of the business that will alter subsequent financial statements
ing.

Selling a business can be a hefty task which may take effort and attention away from your business. In order to balance the business needs as well as the owners needs a support team can be beneficial. Attorneys, accountants, bankers, business brokers and/or other representatives can form the perfect team to execute your sale. http://www.rivercityba.com