Start Retirement Planning Today

Most small business owners don’t make nearly enough money from the sale of their business to survive the thirty to forty years they may live after the sale.  You must start saving early and consistently.  Consider a tax assisted retirement savings program.  Another strategy is to buy the real estate where your business is located. Find a financial planner you trust and start today.  There is nothing worse than being physically or mentally exhausted and having to leave the business but resisting it because you do not have the downstream financial resources.

Many owners we work with intend to augment their savings by seeking employment in the future.  They just want to get the weight of owning a business off their shoulders.  If the income expectations and time requirements are realistic this is a good plan.  Limited future employment is becoming a normal component of many owners’ plans.

If you are not in a position to properly make these types of plans yourself meet with a competent financial planner early.  Find a way to save.  Make it a priority because your future depends on it.

Gregory R Caruso, JD, CPA, CVA
Harvest Business Advisors
Business Brokerage, Business Valuation, Transaction Planning
609-664-7955
www.harvestbusiness.com

How an Experienced Business Broker Sets a Business Sales Price

Small and mid-sized businesses (it varies with the industry but typically up to about $5 million in revenue) that are being sold must have an asking price in order to get activity.  Business brokers know that inexperienced business Buyers absolutely want to know the asking price.  If the asking price is too far from the pricing rules of thumb, they will tend to say they are not interested even if the problem really is price. Americans expect to negotiate, but only a little.  They tend not to want to insult the Seller by offering 50 cents on the dollar.  For this reason, it is important to price a business correctly from the start.

Considering Selling Your Business? Please click here for a downloadable e-book, “ 10 Ways to Increase the Value of Your Business“.

It is very tempting to price a business high and wait for offers.  They rarely come.  Often when they do it is from someone looking to steal a business on the cheap who puts in very low offers on many businesses waiting for someone to accept their offer in frustration..  Believe me, once you commit to sell your business, the process seems to take forever even when it is progressing well.  When no one is calling, it really drags out.  Don’t overprice your business and, later, fall victim to this low-ball Buyer strategy.

There are Buyers for almost all profitable businesses but there may be only two or three in a given market area.  You need to get these Buyers interested.  Proper pricing will do that.  We recommend that you price the business no higher than 10% above the high end of reasonable. This will give you negotiating room while presenting an attractive offering that will encourage prospects to continue looking at your business.

If, after 90 days of proper marketing and prospecting (ads are appearing in the right publications, direct mail has gone to the right people), you do not have serious prospects working on an offer then you should seriously consider cutting the asking price.  The market is telling you something.

 

Gregory R. Caruso, JD, CPA, CVA
Harvest Business Advisors
609-664-7955
gcaruso@harvestbusiness.com
www.harvestbusiness.com

How to Sell Your Business – Who Is My Buyer? For Middle Market Businesses

What every business broker and business appraiser knows is that in order to get the highest price when you want to sell your business you must identify and attract the best, most motivated and qualified buyer for your business.  This will vary with your size, profitability, industry and so on.  This post is one of two identifying buyer groups.  One of the things a knowledgeable broker and exit planner does is help you identify your business buyer and what they specifically want accurately.  This article contains important general information and buyer groups for lower middle market businesses generally with a value of $3 million or above.

Considering Selling Your Business? Please click here for a downloadable e-book, “ 10 Ways to Increase the Value of Your Business“.

Lets start with a story:

When I was young, I would go fishing with my Dad.  We had fun but Dad knew nothing about fishing.  When I got a little older I went fishing with my brother’s boxing coach, Bud.  Bud was a short, stocky man with a brain tumor – the result of more than four hundred amateur and semi-pro fights.  That probably explained most of the crazy things in his life.  But Bud knew how to fish.

He told us that he would fly shotgun in small airplanes looking for unfished ponds on farms.  (This was long before Google Earth).  Then he would go ask the owner if he could fish their pond.  Inevitably they would tell him that there were no fish in that pond but go ahead.  Bud had his special lures and eighty percent of the time he caught tons of fish.  The first time I went fishing with Bud, we caught so many fish so fast it felt like I was cheating!  Bud caught fish by fishing in ponds that had tons of fish because no one had fished them in years.  Bud knew how to find fish and, with his special lures, he caught them.

What does this have to do with selling a business?  The most important thing you have to do is to figure out who and where your fish (Buyers) are.  These are the people who are likely to be the most interested in your business and therefore the people who will pay you the most.  Who these people are will vary with what you have to sell and what you want to accomplish.  Below, we summarize the major groups and when they are likely to be the best Buyers. We address how to find them later in the book.

Remember to make your business as desirable as possible for your ‘best’ buyer.  This may involve physical changes to the business over time.  It may involve providing financing or training that is a little out of the norm.  It certainly will involve looking at the prospective buyers of your business as you would your regular customers and make your product (the total business) as great as possible.

Below, we are outlining how we classify buyer groups.  As with any grouping of people some people will fit several groups and some will not fit any.

Synergistic Buyers.  These are companies that are in the same or a related business that will have sales or operational advantages allowing them to pay more for the business than what is justified by the current selling business cash flow alone.  The classic example of this is a delivery business that buys a competitor with the same territory.  Now instead of making an average delivery for 10 miles of driving they might make one every 5 miles greatly reducing the average cost per delivery.   The key with synergistic buyers is they CAN pay more if they wish.  They tend to be very picky about what and when they buy.  You must understand what they are looking for and when they are buying be willing to sell then.

Private Equity Groups (PEGS).  These are investment groups that are looking for growth oriented opportunities.  Generally they want $3 million of EBITDA (Earnings Before Interest, Taxation, Depreciation and Amortization – a measurement of cash flow potential).  They want a good management structure in place and they want to be about to multiply the company size and resell the company in 5 to 10 years.  Usually the first company they buy in an industry is called a “platform” and is a larger business.  Often after they acquire a platform they will then buy smaller businesses as ” add-ons” as part of their growth strategy.

Competitors.  Sometimes competitors are owned by PEGS and/or are Synergistic but here I am referring to them in a more generic sense.  Competitors are buyers but unless they are actively acquiring competitors they tend to pay poorly and often (but not always) are a last resort buyer.  Of course, if you are in financial trouble they may be the only potential buyer.

Form an ESOP.   An ESOP is an Employee Stock Option Plan.  It is beyond the scope of this article to describe but in the right circumstances is an excellent way to sell your business.  The sale is to a trust that will own your stock for the benefit of your employees.  It is a retirement plan under the internal revenue code so it is quite complex.  Generally if you have 25 or more employees, stable earnings above $2,000,000, then and ESOP should be reviewed as an option.

Whichever buyer type makes the most sense for you and your firm make sure you understand what they will buy, when they might buy it, and most importantly what they will never buy.  As always you may call us to confidentially review your situation.

 

Gregory R. Caruso, JD, CPA, CVA
Harvest Business Advisors
609-664-7955
gcaruso@harvestbusiness.com
www.harvestbusiness.com

Business Valuation for Business Sale Price Estimates – More Detail on Calculating a Valuation Multiplier

Small business valuation for selling your business, or business merger and acquisition purposes is tricky and depends on many factors.  In this article I summarize how a valuation multiplier for a small business could be calculated.  The calculated value should also be checked against the business sales comps available from one or more databases such as Pratt’s Stats, www.bvmarketdata.com  and BizComps, www.bizcomps.comYou can also look in The Business Reference Guide by Tom West, available at www.bbpinc.com  .  Also, get a check from a reputable experienced business broker or valuation professional in all cases before entering into contracts or even negotiations.

Want to know more?  Please click here for the downloadable e-book. “7 Things You Must Know Before You Order a Business Valuation” 

This methodology is most effective for businesses with a value between $150,000 and $1,500,000.  Below $150,000 in value in my experience it is hard to reasonably calculate value although in many cases it does exist.  If the value is low enough you must also look at what the liquidation value of the assets may bring.  Sometimes this is the highest value.  Once a company grows larger than $1,500,000 there are other methods that may be more accurate which should be used to estimate value. We will post another article or articles on valuing larger businesses in the near future.

This methodology works for estimating the business value or business sales value of most types of companies including subcontractors, electrical companies, HVAC, plumbing, engineering firms, service firms such as CPA’s and consultants, manufacturers, government contractors, retailers, restaurants, etc. 

Generally, the multiplier is calculated by looking at risk and how the business will continue to generate cash flow for the new owner and the perceived desirability and growth prospects of the firm.  This is similar to the concept behind bonds or bank accounts.  Junk bonds pay more interest than government insured savings accounts in order to attract your investment dollar.  Of course, you will never lose principal on the government insured savings account.  Small businesses are very risky and carry a large discount usually in the 20% to 50% range.  The safer the business the higher the multiplier.  The higher the multiplier the higher the value and price when it comes time to sell.

Typical factors in the calculation:

  • Ease of entry into business
  • Location of business
  • Competition in Market Area
  • Historical profit trend
  • Industry trend
  • Size of business
  • Management systems in place
  • No one customer providing more than 10% or 20% of sales revenues
  • No major suppliers that would be hard to replace
  • Availability of financing
  • Condition of Books and Records

 One way to do the analysis is to rate each factor above from 1 to 4, with four being the most favorable, then divide by the number of applicable factors.   In all likelihood your business multiple will be between 2 and 3.  The average is between 2.3 and 2.7 depending on who is collecting the data.  Businesses that tend to be owner intensive such as auto shops and small independent restaurants tend to sell around 2 or less.  Highly efficient larger service firms with contracts may sell for 3 to 3.5.  Again, only proven rapid growth companies or unusually hot businesses (think BMW auto dealerships) reach above 4. 

 Example of Calculating a Multiplier:

 Sam’s Auto Repair factors     

Ease of entry into business                                                              1 easy to enter

Location of business                                                                          3 Sam’s is in an urban area where auto related land usage is discouraged

Competition in Market Area                                                          3  Same as above – few competitors, hard to get a nearby location

Historical profit trend                                                                      3 Sam is profitable

Industry trend                                                                                     2 Too many new cars

Size of business                                                                                   2  Sam’s is still small

Management systems in place                                                   2  Has great receptionist / scheduler

No one customer exceeding 10% or 20%                             4  Few large commercial acc.

No major suppliers that would be hard to replace          4  Many parts stores and suppliers

Availability of financing                                                              2  Hard to finance Auto related

Condition of books and records                                                3  Easy to follow, accurate books and records and tax returns

 

That totals 11 factors with a sum of 29 creating a multiplier of 2.6 which is high for an auto repair but the assumptions make this look like a pretty good small business.  Give him poor financial books, low profitability, and a neighborhood with car repair on every corner and you quickly have a 2  multiplier.                         

Now you just multiply your discretionary cash flow by your multiplier and you get an estimate of value.  ($150,000 discretionary cash flow times 2.6 equals $390,000 estimated value).  If done accurately (experience helps!) this can produce a very good indication of value.  It is also useful for internal purposes just as a check to see how you are doing as good businesses are valuable businesses.

DISCLAIMER:  Please note that this is a useful formula for preliminary planning or tracking your progress but is not a substitute for a proper valuation when selling your business.  NEVER go to market or enter into important negotiations or legal proceedings based on a rule of thumb formula such as this.  Get proper valuation assistance.  Call us.

Gregory R. Caruso, JD, CPA, CVA
Harvest Business Advisors
609-664-7955

gcaruso@harvestbusiness.com
www.harvestbusiness.com

 

Small Business Valuation: What is a Valuation Multiplier?

In business valuation for the sale of large and small business, it goes without saying that a business with a multiplier of four is going to be twice as valuable as that same business with a multiplier of two. 

It therefore becomes extremely important to select the correct multiplier when valuing a business.  If you choose a  wrong multiplier you will only be fooling yourself as most Buyers are well informed by the time they buy.

The average multiplier for all businesses with a value below one million dollars is between 2.3 and 2.7 depending on the database source.  This multiplier is applied or multiplied against what is known as Owner’s Discretionary Earnings. Owners Discretionary Earnings is every way the owner makes money i.e.  Owner’s Salary, Owner’s Benefits, Profits, One time expenses, plus Interest and Depreciation.

Want to know more?  Please click here for the downloadable e-book. “7 Things You Must Know Before You Order a Business Valuation” 

Small Business Valuation, What is a Valuation Multiplier?

How do I Calculate a Multiplier?

Intensive businesses, such as independent restaurants and auto repairs shops, that tend to wear down an owner often sell for 1.7 to 2.5.  

Profitable retailers often have a multiplier of 2 to 3.  

Service businesses with repeat customers sell around 3. 

Businesses with long-term contracts such as some government contractors, long-term service contracts, etc. can sell for 4 or more. 

Finally, businesses in very ‘hot’ industries or high growth businesses, such as software companies starting a successful implementation phase, may sell for higher multiples.   Larger and/or more profitable businesses will sell for more than small or less profitable businesses.

Generally, the multiplier is calculated by looking at risk and how the business will continue to generate cash flow for the new owner and the perceived desirability and growth prospects of the firm. 

For small businesses the employment opportunities of the buyer may also be a factor.  (If the owner can make $100,000 per year as an employee they may be less likely to buy a business generating $75,000 of discretionary earnings).  This is similar to the concept behind bonds or bank accounts.  Junk bonds pay more interest than government insured savings accounts in order to attract your investment dollar.  Of course, you will never lose principal on the government insured savings account. 

Small businesses are very risky and carry a large discount usually in the 20% to 50% range.  The safer the business the higher the multiplier.  The higher the multiplier the higher the value and price when it comes time to sell.  

Gregory R. Caruso, J.D., CPA, CVA
Harvest Business Advisors
www.harvestbusiness.com
gcaruso@harvestbusiness.com

 

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