Pricing A Business – How much is my business worth?

Pricing A Business – How much is my business worth?

1. Value of tangible business assets

Tangible assets are physical, such as furniture, equipment, and inventory. If the tangible assets are in reasonable shape, there may be a ready market for them. An appraiser can help you put a value on these tangible assets.

2. Value of intangible business assets

There may be value in your business name, or in patents, copyrights, or customer lists you own. And favorable long-term contracts with customers or suppliers or a transferable long-term lease in a good location can also be valuable intangible assets. Employees can also be important intangible assets.

3. Sale prices of comparable businesses

The closest to an ideal way to set a value on your business is to see what other small enterprises like yours have sold for. In the real estate business, this is called looking at comparables.

4. Industry formulas

In some businesses, it is often said that you can arrive at a sales value by multiplying either gross sales or net earnings by an accepted number. If you’re considering buying a business in a field where formulas like this are part of the culture, look at what the price would be using that formula, but don’t ignore other factors.

5. Market demand

If a number of similar businesses have just been put on the market or there’s been a recent spate of factory closures in your area, there may be no interested buyers at your price or within what you believe is a reasonable range.

6. Your personal needs

If financial pressures are forcing you to sell your business quickly, you’ll probably have to take less than the optimal sale price. Or, if you’re unable or unwilling to work for the buyer — even for a short time after the closing — that fact may diminish the value of the business in the eyes of a buyer.

7. Type of buyer

For a buyer who will be relying on the business for a livelihood, the sale price and the terms of payment need to result in cash flow that is sufficient to cover paying the buyer a decent salary — in addition to covering operating expenses and installment payments to you. But for a buyer who is considering your business as a strategic addition to a similar business he or she already owns, the

benefits of scale may allow a lower price; bookkeeping expenses, for example, may increase only slightly when the buyer adds a second location.

8. Terms of payment

The terms you require, such as the amount of the down payment, the repayment period, and the interest rate, can all affect how much a buyer will agree to pay. And you may want to charge more if you’ll be paid over five rather than three years, for instance, since during the repayment period, you’ll be exposed to more risk of buyer default.

9. Appraisals

Appraisers excel in assigning values to tangible property such as land, buildings, and equipment. However, in most cases, a business is worth more than the sum of its assets, so if you choose to use an appraiser, pick one who understands and has had experience in including the nontangible factors, such as a favorable lease or excellent goodwill.

10. Put it all together

All or some of the above factors can be used in pricing your business. But keep in mind that the overall deal — price and payment terms — has to be realistic, even though you’d like the sale price to be as high as possible. You need to feel reasonably certain that the buyer is unlikely to falter and that the odds are that in three or five years, the buyer will make the final payment. This means that, during the years the buyer is making payments and also probably working in the business, the business must produce enough income to pay the buyer a decent salary in addition to covering the monthly payments to you.

Talk with an experienced Business Broker

When trying to value your business, it is best to talk with an experienced business broker. In most cases they can give you a free confidential consultation and appraisal.

So how much is the Average Business Worth?

On average most small businesses are worth 2.7 x cash flow. This price includes all Inventory, Furniture Fixture and Equipment (FFE), Customer List, Business name, etc. Here are some standard pricing guidelines however this is somewhat vague as the real price will depend on market, customers, location, business reputation, cash flow, and gross sales.

Restaurants – 2.7x cash flow

Retail – 2.7 x cash flow

Service – 2.x7 x cash flow

Manufacturing – 2.5 – 3.5 x cash flow

Coin Laundries – 1 x gross sales

The business Broker Journal – Learn how to Price a Business. How much is a business worth.

Steps in Selling Your Business

1. Determine a Realistic Price Range

If you price your business too high, you’ll scare away buyers. If you price it too low, you’ll lose out. To figure out a range that’s realistic, you can use one of several methods – and then maybe blend the results. For example, you can base the price on the value of the business’s assets, and add in a sum for the goodwill the business has developed. Or you can see how much comparable businesses in your industry and locale have recently sold for. Or you can use an industry formula (for example, a value based on the number of units sold annually or a multiple of average earnings).
2. Understand the Tax Consequences

Taxes can take a huge bite out of the money you receive for your business. It pays to know just how big that tax bite will be — and to try to lower it, most likely with help from a CPA or other tax expert.

Your tax bill will be influenced by two key factors: How your business is legally set up and — in the case of a corporation or LLC — whether you’re selling the assets or the entity. Sales of all sole proprietorships and almost all partnerships are asset sales. So are the sales of many corporations and LLCs.

3. Look Good for a Sale

The getting-ready process includes not only sprucing up your premises, but getting your numbers in good shape. Consider recasting your tax-return numbers for prospective buyers. This can involve, for example, adding back to your profits discretionary expenses such as medical insurance for you and your family, travel and entertainment, business vehicles, memberships and subscriptions, and salaries and bonuses paid to family members.

In recasting your tax numbers, you’re not deceiving either the IRS or prospective buyers. You’re simply pointing out that the buyer may prefer not to spend money on some of these items in the future.

4. Seek Potential Buyers

If your business is well known, word that it’s for sale may be enough. Or, possibly someone close to you — an employee, a friend, or a customer — could be a prospect. But more likely, you’ll need to reach out to a bigger pool. This often includes putting ads in newspapers and trade publications, and on business-sale websites like The business Broker Journal.

5. Confidentiality

Confidentiality is one of the most important tools when it comes to selling your business and should not be taken lightly. It is extremely important when selling your business to keep as much information as possible confidential. This means, it is not a good idea to advertise the business name or address for sale because it can negatively affect your business operations. If existing employees find out your selling they may feel their job is in jeopardy and may begin looking for another job. The same goes for customers or vendors, if they learn your business is for sale, they may feel like your business is closing or that they are loosing the business relationship they have built with you over the years.

6. Hire A Business Broker

A Business Broker is a professional business advisor experienced in buying and selling existing businesses. Business Brokers generally work for commission only and are paid by the seller. Fees are usually around 10 % of the purchase price with a minimum fee between $8,000 & $20,000. Find a local business broker.

There are many benefits to hiring an experienced Business Broker.

1) Brokers already have established relationships with people interested in buying existing businesses.

2) Brokers will handle the transaction from start to finish.

3) Brokers know how to keep your business sale confidential as well as pre-screen buyers.

4) Brokers will advertise your business for sale confidentially using their own money to do so.

5) Brokers work for the seller and are paid a commission only after selling the business.

6) Brokers will help you determine the best price to list your business for sale.

7) Brokers will help you negotiate the best price for a business. Often much higher than you would get if selling your business by yourself.

Brokers will help the buyer with financing solutions.

9) Brokers will help the buyer and seller through the due diligence process.

10) Using a broker in general will save you money, time, and stress.

7. Negotiate Your Deal

In working out the terms of the sale, some key issues include whether you’ll sell the business entity or just its assets, what assets (like a truck) you want to keep, and how the buyer will pay you (usually, a down payment plus installments).

8. Sign a Sales Agreement

You’ll need to put the deal in writing. Among other things, your agreement should list and value the assets the buyer is purchasing, list any contracts the buyer is assuming, and include protections that assure you’ll get paid the full sale price. If you attempt the first draft of the sales agreement yourself, have it reviewed by a business lawyer to make sure you’ve covered all the bases.

9. Plan for the Closing

The closing is the meeting at which you transfer the business to the buyer. To reduce last-minute hassles, make a checklist of all the papers you and the buyer will need to bring — everything from the documents and money associated with the transfer to your alarm codes, keys, and customer lists.

10. File Paperwork With the IRS

After the sale, you and the buyer need to jointly complete IRS Form 8594, Asset Acquisition Statement and file it with your tax returns for the year of sale.

For more information on selling your business visit the Business Broker Journal website www.businessbrokerjournal.com

Financing the Purchase of a Small Business:

Financing the Purchase of a Small Business:

If only I was paid a dime for every buyer that has came to me thinking they can finance a business with no money down….

The truth is and this has absolutely nothing to do with the current financial crisis. You cannot finance a business with no money down. Now before the emails start filling my mailbox up with exceptions please let me explain myself.

Financing a small business requires one of these 2 options: A down payment from the buyer and seller financing for the balance, or a 100% purchase by the buyer with no seller financing. Let’s discuss them in more detail.

Down Payment & Seller Financing:

No seller in their right mind will sell a business without some form of down payment. The buyer must have an equity investment into the business for the seller to feel comfortable financing the balance and more importantly turning the business over to a new owner. Without this equity, the buyer has no exposure and could simply walk away at any time.

The typical down payment on a small business with seller financing will completely vary from deal to deal. The motivation of the seller will play a huge roll in this equation. One seller may accept 20%, another can be as high as 80%. Typically sellers would like to see the down payment close to 50%.

Terms of the Seller Financing Note:

Negotiate with the seller financing so that you are 100% comfortable in being able to cover the debt service out off the income from the business. A good place to start would be to look at a seller note amortized over 5 years (60 months) at 6 or 7% interest. (Use a mortgage calculator or auto calculator at Bankrate.com to calculate the payment) On larger transactions, the financing can spread over possibly 10 years with a balloon payment due in 5 years. A balloon payment means you will be required to pay the balance off on the last payment.

So now that we know a down payment will be required, where and how do we get the money? There are several sources from personal savings, family, friends, private investors, and banks.

Bank financing the down payment or 100% of the Purchase:

If you decide to use a bank for your financing method on the down payment there are a couple key facts to understand. Today banks are requiring buyers to put down a minimum of 15 – 20% down payment. This is money you must come up with to get the loan. In addition, you will need to have experience in the industry or least management experience and a good credit score to even qualify for the loan. Yes, that’s right. You will need to have a good credit score. Next, they will take a very close look at 3 years financial history on the business. If the business does not have strong financial tax records then you need to be considering a personal loan from the bank because a business loan is out of the question.

Personal Loan:

If you have good credit you may be able to qualify for a personal loan from the bank to use as the down payment or purchase. You may have a home you can refinance, a CD to borrow against, or another asset that can help secure the loan.

The Common Misconception from Bankers:

It is very common for bankers that do not specialize in SBA loans to unfortunately mislead buyers into believing they can easily give them a loan. It is not the bankers fault in this; they are just trying to bring in new business to the bank. The truth is very few bankers know anything about buying or financing a business. In my opinion, they just bring the new application in, process the loan and it’s the team of underwriters behind the scene that are the decision makers and who have the restrictions set in place. The best way to find a qualified SBA loan broker is to contact your local Business Broker and ask for their opinion. Business Brokers are an excellent resource for financing.

3 Bank Qualifications Needed for a Small Business Loan:

1. Experience
2. Cash Down Payment 15%-20%
3. 3 years profitable financial history on the business

Negotiate and Make the Deal Work:

Now that you understand the financing structure required to buy a business, contact a local business broker and search for a business for sale that fits your requirements. Once you find that perfect business, have the broker negotiate the financing terms for you with the owner. Remember the Broker has every incentive to get the deal done and they will go to great lengths to make the pricing and terms work.

Questions / Comments:

This article is published by the Business Broker Journal, A business for sale marketplace. If you have any questions or comments on this article please send us an email to blog@businessbrokerjournal.com.

Requests / Advice:

The Business Broker Journal answers 100’s of questions from business buyers and sellers every week. If you have any questions on buying a business send us an email to:

blog@businessbrokerjournal.com and we will promise a response within 72 hours.

Upcoming Blog Articles;

Using a 401K retirement account to finance your business:

What should the first offer be?

Published by:

The Business Broker Journal

http://www.businessbrokerjournal.com

Business Broker Journal launches New Website Design

The Business Broker Journal has launched a completely new website design that makes it easier for people to find businesses for sale, franchise opportunities, or contact a Business Broker.

Created in April 2007, The Business Broker Journal is the fastest growing Business For Sale Marketplace in the US. With 1000’s of businesses for sale, 100’s of Business Brokers, and a growing list of franchise opportunities.

In addition to providing businesses for sale, their new website provides important business resources including access to free Health Insurance Quotes, Payroll Services, Business Forms, Business Webhosting, Loan Calculators, and more.

The Business Broker Journal is simply a one stop source for business owners, business brokers, or anyone looking to buy or start a business.

For more information visit www.businessbrokerjournal.com

What is a Business Broker?

What is a Business Broker? A business broker is a person or firm who acts as an intermediary between buyers and sellers of a small business.

A business broker provides professional services for both the buyer and seller of a small business including estimating the value of the business, advertising the business for sale by maintaining confidentiality, interviewing and qualifying potential buyers, introducing interested and qualified buyers with the seller, writing up and explaining an offer to purchase, negotiating the purchase price between the buyer and the seller, assist the buyer in financing methods, collect and review due diligence items with the buyer, and assist with an attorney on closing documents.

How many Business Brokers are in the US? There is approximately 3,000 Business Brokers located in the US. About half work as sole intermediary’s and the other half are part of a franchise or multiple office network.  Sunbelt Business Brokers is the largest business brokerage company in the world with over 300 offices worldwide.

Why use a Business Broker? A business broker can provide both the buyer and seller specific knowledge and experience in the sale of a business. In many cases using a broker can make or break a deal. Business Brokers will often show buyers opportunities they may never have considered and can help educate buyers on the importance in finding the right type of business for their lifestyle.

When selling a business, a broker will most-likely bring more qualified buyers than a seller can achieve on their own.  In addition, they will provide an important screening tool for the seller by pre-qualifying buyers upfront and determining the best options for the buyers financing. Brokers can also help the seller understand and determine the best price to ask or accept for their business.

Business Broker Fees and Compensation? Business Brokers are paid by the hour, retainer, or a success fee (commission paid at closing). The most commonly used is a success fee commission structure where the broker is paid by successfully selling the business. Retainer fees are becoming more popular to help recover upfront costs associated with marketing the business and it also shows a commitment from the seller that they are serious in selling their business.

Success fee commissions range from 8% – 12% of the total purchase price. Typically for smaller transactions there will be a minimum commission fee of $10,000 – $20,000.

Licensing of Business Brokers: In the US, licensing of business brokers varies by state. A real estate license is required by 13 states including Arkansas, California, Colorado, Florida, Georgia, Idaho, Illinois, Michigan, Minnesota, Nebraska, Nevada, Oregon, South Dakota, Utah, Wisconsin, and Wyoming.

For more information please visit the Business Broker Journal and Search Businesses for Sale, franchise opportunities, and find a business broker.