Business Opportunities

  Pricing a Business

If you are thinking about buying or selling a business, one of the first questions that will likely cross your mind will be - how much is this business worth? There are a variety of different valuation models. Some are elementary, others very complex.

Valuation depends on a number of factors including the industry type (e.g. service, retailing, manufacturing, etc.), corporate structure (e.g. division of a corporation, franchise, owner-operated, etc.), present growth rate and local market conditions. Using a benchmark such as annual gross sales, an equipment rental company may sell for a price of typically less than 2% of sales whereas an accounting practice may sell for 90% - 100% of gross sales. Many businesses are fairly valued with the inclusion of goodwill (another word for customer loyalty that we all presume will remain undisturbed upon the sale of the business). Other businesses, such as used car dealerships, are traditionally not priced with an allowance for goodwill.

There are a number of excellent reference texts on the subject of business valuations. We encourage you to become familiar with this basic but critical information before venturing into the purchase or sale of any business. The more informed you are on valuation standards, the better the outcome of your venture. With this in mind, the following are a number of key points you should keep in mind as a prospective buyer or seller.

  Buying a Business

• If you do not have experience in the type of business you are considering to buy, take some time to thoroughly research both the business and the current market conditions. This includes researching your present and future potential competitors.



• Your chances of success are much higher if you have prior experience in the type of business you are planning to buy. You are safer knowing what you are getting into.



• If you don't believe you can improve on the existing business, you should probably not buy it.



• Work up a Letter of Intent that spells out the terms of the purchase of the business. This should be thoroughly reviewed and signed off by all relevant parties prior to opening escrow. A Letter of Intent, by itself, is not binding. However, it does help clarify the terms of the deal and helps avoid delays or misunderstandings after escrow has been opened and earnest monies deposited.



• Have your attorney review all leases under contract with any business you are planning to buy.



• While your attorney's advise can be very helpful during your due diligence phase, you must make the final decision. It is you, not your attorney, who will be running the business on a day-to-day basis.



• You need to have more than enough capital to acquire the business, re-stock inventory for the next three to six months (if the business sells product) and absorb any near-term decline in sales due to loss of clientele.



• If you are planning to buy a retail business, be cautious if the current lease expense is anything more than 15% of total monthly expenses.

  Selling a Business

• Be patient in finding the right buyer. According to a recent study conducted by the California Association of Business Brokers (CABB), the average time to sell a business is over six months.



• It helps greatly if your financial records are in order such that prospective buyers can realistically expect funding either through the SBA or the more aggressive business lending banks.



• Selling your business is much like selling your home. A business facility that looks clean and professional leaves a positive impression with prospective buyers.



• If your business is not profitable, make it clear that this is the case. Buyers are investing equally into your business and their vision of how they believe they can grow the business.



• If you are taking back a promissory note from the buyers, you are much safer if the buyer has demonstrated sufficient financial backing in the event that they lack experience in your industry. If the buyer fails to succeed after buying your business, you do not want them blaming their failure on either you or your broker!



• Make sure your business broker asks prospective buyers to be discrete when doing any due diligence walk-throughs of your location.



• Give your broker some guidelines as to the screening of financial and business qualifications of potential buyers. It is important that your broker doesn't turn away people that would have been a good fit for your business.



• Be prepared to spend a number of evenings and time on weekends to meet with your broker and prospective buyers.



• Discuss with your broker the details of how your business should be marketed and what information can be discussed with people making initial inquiries.



• Misunderstandings can arise between buyers and sellers during the due diligence phase. If you sense the buyer may misunderstand anything potentially significant, ask your broker to discuss the issue with the buyer's broker.



• Don't hold out for the "top dollar". Your objective should be to find a buyer that is both: 1) a good long-term fit for your business; and 2) has ample financial capital to make it a success.

If you have any specific questions regarding how we can help you in buying or selling a business, send us your request.