- What were your gross sales the last 3 years?
- What are your gross sales year-to-date?
- What was your net income the last 3 years?
- What is your net income year-to-date?
- What are factors affecting your gross and net income and what are those trends?
- Do you have any clients that represent more than 10% of your gross sales?
- How does your asking price compare to your gross and net income, and industry norms?
- How much inventory is included?
- Is that value at your cost or the retail value?
- How much of that inventory is salable?
- What are your lease terms?
- How does that compare to your gross sales, and current market lease terms?
- Do you have any debt on the business that I'd have to assume for this purchase price?
- Are you offering seller financing for part of the purchase price?
- What is the minimum down payment a buyer needs?
- How many hours a week are you working in your business?
- How much vacation time do you take?
- Are there any key employees, and what is the likelihood they remain with the business after the sale?
- What are your functions on a daily basis?
- Is your business cyclical?
- What are the minimum cash flow needs?
- What special skills does the buyer need to possess to be successful?
- What kind of non-compete clause are you offering?
- What kind and amount of training are offering during the transition period?
- What is the likelihood that business will be lost because of a change in ownership?
- Will I get paid my normal fee for bringing a buyer to you that purchases your business?
Thursday, July 30, 2009
Do you have a buyer for my business?
When I speak with sellers, sometimes their first question for me is, "Do you have a buyer for my business?" As common as that question is, I am still surprised when I hear it asked. If I know nothing at all about your business, or, if I've seen your website, how is it possible to have someone looking for exactly what you are offering, without knowing the following?
Thursday, July 16, 2009
When is the right time to sell my business??
2009 isn't shaping up to be a stellar year for many businesses. What are you to do if you have an interest in selling your company right now? For those of you tempted to hold on to your business until conditions improve, I'll share some timing information for you to consider.
As always, the sale of anything is a factor of your motivation. If you aren't really motivated, you'll place an unusually high price on your item, and if someone makes you a full-price offer, they can have it!
What if the motivation is there, though business conditions aren't ideal to get the highest price possible (like if you sold last year when business was better). I haven't figured out a way to sell your business last year if you still are operating it. Here is some insight into how buyers will likely value your business.
They'll typically want to see the last 3 years of operating results, and, the year-to-date results. If your YTD results haven't been good, waiting until 2010 doesn't do much to help with the market value of your company. In 2010, you'll have a full year of 2009 to show your buyers. If 2009 was not as good as 2008, assuming business picks up in 2010 (dust off your crystal balls, right?), you'll need to have the full year of 2010 completed to get credit for it. Though, buyers want to see a pattern, and one year does not make a pattern. It might help explain away 2009's results, though, 2009 did happen, and that will get averaged in someway with 2008 and 2010. So, now you are 2 years out (the rest of 2009, and all of 2010, and part of 2011), without knowing if 2010 will be better or the same as 2009.
Reality is. You need to get in touch with your motivation. If you still see yourself running your business in 2 years, and if you are ok with the value of your business being the same or even lower than it is today, then holding on and running it might be your best strategy. Though, if you are motivated to sell, and don't want to be running your business in 2 years, now is likely just as good a time to sell as it will be over the next few years.
As always, the sale of anything is a factor of your motivation. If you aren't really motivated, you'll place an unusually high price on your item, and if someone makes you a full-price offer, they can have it!
What if the motivation is there, though business conditions aren't ideal to get the highest price possible (like if you sold last year when business was better). I haven't figured out a way to sell your business last year if you still are operating it. Here is some insight into how buyers will likely value your business.
They'll typically want to see the last 3 years of operating results, and, the year-to-date results. If your YTD results haven't been good, waiting until 2010 doesn't do much to help with the market value of your company. In 2010, you'll have a full year of 2009 to show your buyers. If 2009 was not as good as 2008, assuming business picks up in 2010 (dust off your crystal balls, right?), you'll need to have the full year of 2010 completed to get credit for it. Though, buyers want to see a pattern, and one year does not make a pattern. It might help explain away 2009's results, though, 2009 did happen, and that will get averaged in someway with 2008 and 2010. So, now you are 2 years out (the rest of 2009, and all of 2010, and part of 2011), without knowing if 2010 will be better or the same as 2009.
Reality is. You need to get in touch with your motivation. If you still see yourself running your business in 2 years, and if you are ok with the value of your business being the same or even lower than it is today, then holding on and running it might be your best strategy. Though, if you are motivated to sell, and don't want to be running your business in 2 years, now is likely just as good a time to sell as it will be over the next few years.
Tuesday, June 16, 2009
How important is the term of the lease?
The lease terms are certainly importance for any business. Could I determine my interest level in a business based on current lease terms alone? No. Some buyers get hung up, during our first phone call, on the remaining term of the lease. There are pros and cons to everything in life, and it is no different here.
Today, we are more likely than not going to find a lease that is above current market rates. Would it be a benefit to a buyer to have this premium rate locked in long-term? Of course not. The biggest benefits to a buyer to have a long-term lease in place is if the lease terms were below market (not too likely), if the location is crucial to the businesses success, or if it would be cost prohibitive to move.
Regardless of the remaining lease term, a buyer should always have a lease contingency in their purchase offer. If you use a standard California Association of Business Brokers form, there are checkboxes in the lease contingency paragraph for either a) buyer obtaining a new lease, or b) buyer getting an assignment of the lease.
When the buyer has fully assessed the businesses viability, they will be in a position to determine if they want the lease assigned, as is, or if they'd like a new lease. In today's environment, landlords do not have the upper hand in negotiations. Landlords will still be stubborn, and will still kill transactions, though now more than in recent years you are likely to come across a more humble landlord, and you will hopefully get a new or restructured lease which will save you money and help the business be more profitable.
Today, we are more likely than not going to find a lease that is above current market rates. Would it be a benefit to a buyer to have this premium rate locked in long-term? Of course not. The biggest benefits to a buyer to have a long-term lease in place is if the lease terms were below market (not too likely), if the location is crucial to the businesses success, or if it would be cost prohibitive to move.
Regardless of the remaining lease term, a buyer should always have a lease contingency in their purchase offer. If you use a standard California Association of Business Brokers form, there are checkboxes in the lease contingency paragraph for either a) buyer obtaining a new lease, or b) buyer getting an assignment of the lease.
When the buyer has fully assessed the businesses viability, they will be in a position to determine if they want the lease assigned, as is, or if they'd like a new lease. In today's environment, landlords do not have the upper hand in negotiations. Landlords will still be stubborn, and will still kill transactions, though now more than in recent years you are likely to come across a more humble landlord, and you will hopefully get a new or restructured lease which will save you money and help the business be more profitable.
Sunday, June 7, 2009
Seller Financing
When I meet with a client for the first time, I always ask if they've considered providing part of the financing for the sale of their business. The answers are either "I'd rather not", or "Do you think I need to do that?"
Here are the options:
1) Cash buyer
2) Down payment with SBA financing
3) Down payment with seller financing
1) Cash buyers are the preference. Here is the stumbling block. As far as a buyer's expectation, they typically want to use their cash for leverage. If someone has $150,000 for a down payment, here are some of their options:
a) Buy a business for all cash. Positive is that there is no debt service. They are probably buying a business netting $80,000-$100,000 a year.
b) Buy a $500,000 business, with $100,000 down, and $400,000 financed through SBA, or combination of SBA and owner financing. They SBA will typically require a 20% down payment, so the buyer can get leverage on their money. They can probably get a net income before debt service of between $200,000 and $300,000. So, after debt service, they are likely netting more than the $80,000 - $100,000 they could net if they paid all cash.
So, although the preference of the seller is to find a cash buyer, the buyer is better off leveraging their capital and simply making more money. Also, a general rule of thumb is that a buyer expects to be able to earn whatever amount they are using as their down payment. Again, rule of thumb.
2) SBA financing. In order for the business to qualify for SBA, you need at least these 4 circumstances to be met.
a) The business needs the past 3 years of tax returns (you'll be shocked at how often the seller won't provide tax returns)
b) The tax returns need to show enough profit that it covers debt service by at least 1.25-1.35 times (the bank wants a 25-35% cash flow cushion above the debt service amount).
c) The tax returns, after showing 1.25-1.35 times debt service coverage, needs to provide a livable wage for the buyer. The SBA will have them fill out a form that lists all of their expenses, and they have to be able to earn a certain percentage above having all of their expenses paid.
And, if that isn't tough enough...
d) The buyer needs industry experience, or experience transferable to the business.
So, it isn't that bank or SBA money isn't out there, it's difficult for a business to qualify.
3) And that's why the seller typically needs to provide some sort of financing for the buyer's purchase. They'll get a personal guarantee from the buyer, we will receive a copy of the buyer's credit report, proof of funds in the bank and investment accounts, a note evidencing the debt, and a lien on all equipment of the business.
Here are the options:
1) Cash buyer
2) Down payment with SBA financing
3) Down payment with seller financing
1) Cash buyers are the preference. Here is the stumbling block. As far as a buyer's expectation, they typically want to use their cash for leverage. If someone has $150,000 for a down payment, here are some of their options:
a) Buy a business for all cash. Positive is that there is no debt service. They are probably buying a business netting $80,000-$100,000 a year.
b) Buy a $500,000 business, with $100,000 down, and $400,000 financed through SBA, or combination of SBA and owner financing. They SBA will typically require a 20% down payment, so the buyer can get leverage on their money. They can probably get a net income before debt service of between $200,000 and $300,000. So, after debt service, they are likely netting more than the $80,000 - $100,000 they could net if they paid all cash.
So, although the preference of the seller is to find a cash buyer, the buyer is better off leveraging their capital and simply making more money. Also, a general rule of thumb is that a buyer expects to be able to earn whatever amount they are using as their down payment. Again, rule of thumb.
2) SBA financing. In order for the business to qualify for SBA, you need at least these 4 circumstances to be met.
a) The business needs the past 3 years of tax returns (you'll be shocked at how often the seller won't provide tax returns)
b) The tax returns need to show enough profit that it covers debt service by at least 1.25-1.35 times (the bank wants a 25-35% cash flow cushion above the debt service amount).
c) The tax returns, after showing 1.25-1.35 times debt service coverage, needs to provide a livable wage for the buyer. The SBA will have them fill out a form that lists all of their expenses, and they have to be able to earn a certain percentage above having all of their expenses paid.
And, if that isn't tough enough...
d) The buyer needs industry experience, or experience transferable to the business.
So, it isn't that bank or SBA money isn't out there, it's difficult for a business to qualify.
3) And that's why the seller typically needs to provide some sort of financing for the buyer's purchase. They'll get a personal guarantee from the buyer, we will receive a copy of the buyer's credit report, proof of funds in the bank and investment accounts, a note evidencing the debt, and a lien on all equipment of the business.
Wednesday, June 3, 2009
Trends in Small Business Acquisitions
The most common question I receive is, "How is business." And I'm never sure the best way to answer that. Should I plug my services and skillsets, or just answer the question?
In the small business arena, there always seems to be people interested in buying business, and people selling businesses. Are the buyers real, and are the sellers serious? Those are two questions I ask myself multiple times a day.
Industry statistics show that roughly 9 of 10 buyer calls to business brokers ultimately never buy a business. So, my biggest job is trying to find out if someone is serious or not. You can tell the serious sellers mostly by how they price their businesses.
The biggest trend I see now is the reason behind the sale of business. There are more businesses now that are selling because they are losing money, and they should shut down. A buyer needs to be thorough in their due diligence, especially when it comes to the reason behind the sale, and the likelihood of the business continuing. I'd ask the seller or their representative in the first communication why the seller is selling (almost everyone does). I'd make a note of that and make sure the story doesn't change over time, and that it makes sense as you get more information.
The next big trend is the way business purchases are getting financed. It's harder to get SBA financing, though it was pretty difficult before the financial markets imploded. The two most popular ways businesses are financed today are either cash, or cash with seller financing.
In the small business arena, there always seems to be people interested in buying business, and people selling businesses. Are the buyers real, and are the sellers serious? Those are two questions I ask myself multiple times a day.
Industry statistics show that roughly 9 of 10 buyer calls to business brokers ultimately never buy a business. So, my biggest job is trying to find out if someone is serious or not. You can tell the serious sellers mostly by how they price their businesses.
The biggest trend I see now is the reason behind the sale of business. There are more businesses now that are selling because they are losing money, and they should shut down. A buyer needs to be thorough in their due diligence, especially when it comes to the reason behind the sale, and the likelihood of the business continuing. I'd ask the seller or their representative in the first communication why the seller is selling (almost everyone does). I'd make a note of that and make sure the story doesn't change over time, and that it makes sense as you get more information.
The next big trend is the way business purchases are getting financed. It's harder to get SBA financing, though it was pretty difficult before the financial markets imploded. The two most popular ways businesses are financed today are either cash, or cash with seller financing.
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