by Intuitive Digital | Jun 11, 2013 | Advice
Even when you have a viable business that is priced right, buyers are rarely willing or able to plunk down the entire sum in cash.
Traditional lenders have strict underwriting requirements for business acquisition loans and often require significant collateral to ensure repayment if the business doesn’t perform as expected. In addition, buyers will need at least 20 percent of the purchase price as a down payment.
If the buyer can’t borrow what they need, seller financing is another option. This means the seller “loans” a portion of the purchase price to the buyer, who pays it back from post-sale business operations. Usually the seller holds the right to take back the business if payments are missed, but as noted below, the seller’s security may be subordinated if the buyer also has conventional financing.
My friend Eric Williams, a business broker with Codiligent, LLC estimates that on average, seller financing accounts for 43 percent of the price paid for all business acquisitions. That’s a lot of skin in the game for a seller who may be counting on the proceeds to fund retirement or the purchase of a new business venture. For starters, the seller no longer calls the shots and thus can’t prevent the buyer from making unwise choices that affect profitability. Likewise, if the buyer also has conventional financing, the lender will most likely insist on first dibs to the collateral if the buyer runs into trouble.
If you are anxious to sell, seller financing may have to be part of the package. If so, do your best to ensure that you get enough cash up front to stay solvent and set an interest rate high enough to compensate for the risk of nonpayment and potential lack of collateral. But for those sellers who aren’t in a hurry, it may be wise to wait for the right buyer to avoid seller financing or at least reduce it to no more than 10-20 percent of the purchase price.
by Intuitive Digital | Jun 6, 2013 | Advice
Many small business owners want to know what their business is worth. The answer, as in any transaction, is what a buyer is willing to pay. And what a given buyer will pay may depend on a host of factors regarding the particular industry and the condition of the business. For detailed information, it pays to use a business valuation expert such as Dan Gilbert at Gilbert Valuations, LLC.
Business brokers often use shorthand formulas based on multiples of earnings to project a potential sales price. This makes sense because earnings are more relevant than gross sales. And buyers tend to view the purchase of a business as an investment. Using a multiple of earnings formula allows the buyer to have a sense of how long it will take to recoup that investment and begin making a profit.
Simple enough so far, but how to know what it means for a particular business? For starters, which earnings do we mean? Last year’s? A rolling average of past earnings? Current earnings? Or projected earnings that forecast the future? Assuming we can agree on the right time period to measure, the next question is how do we calculate those earnings? Most accountants commonly use a formula that measures earnings before interest, taxes, depreciation, and amortization (“EBITDA”). It sounds complicated, but the goal is simple – finding out how much cash the business generates from operations.
After deciding which earnings and how to calculate them, the third question is what multiplier to use? For most businesses, it’s somewhere between 3 to 5 times EBITDA. For a buyer, this would mean recouping your investment in 3 to 5 years from profits of the business.
The bottom line is that rules of thumb are simply a shorthand way to “guesstimate” a possible sales price. Many factors come into play, and there’s no substitute for using a qualified professional to evaluate the particulars. As they say, actual mileage may vary.
by Intuitive Digital | Jun 4, 2013 | Advice
Anyone who is self-employed is essentially running a business. But not every self-employed person has a business to sell. The difference comes down to whether you have created value that is independent of your own ongoing involvement. Obviously a business owned by a passive investor doesn’t depend upon that owner for its success. But this can be true for a solopreneur as well.
For example, if you are an inventor with a patent for a new manufacturing process or a software developer who has written a new mobile application, a buyer can pick that up and run with it because the patent or mobile app has intrinsic value. If you simply offer a service to the public, then there may be much less value to offer a buyer if you are no longer part of the business.
If you are in the latter group, there are ways to add value and potentially create a market for someone else to buy you out. One factor that a buyer will want to see is predictable future income.
If you are a service provider who works on an “as-needed” basis for customers, there’s no guarantee of future revenue, especially if the primary service provider is leaving. But if you have an established client base with longer-term service agreements, then it is easier to show the likelihood of ongoing revenue.
In addition, it would be wise for the seller to remain involved in a transition role after the sale to help introduce the new buyer to the business and its customers.
Another way to add value is to demonstrate a new, but untapped market segment, or an opportunity for a buyer to develop a new service line or product.
Take some time to figure out if you have a business to sell. And if you’re not sure, it may be a good time to make some plans to ensure that you are creating unique value that will be worth something to a prospective buyer.
