The 3 Most Critical Issues in Buying or Selling a Business

Posted on April 7, 2020 by William Bruce

UPDATED June 2025, by William Bruce with the most current information.

Here’s what to look for when buying or selling a business.

As a business broker with offices in Fairhope, Alabama and Baton Rouge, Louisiana,  I’m often asked what the top critical issues are in buying or selling a business.  If the top three issues discussed below in the sale or purchase of a business are not properly addressed, then there is a good chance the transaction will fail.

So to get to the core of the question, these are, in my opinion, the top three issues involved in buying or selling a business:

Critical Issue #1: Confidentiality

Confidentiality is critical to the successful transfer of a business.  If word gets out that a business is for sale, several things start happening, and none of them are good for the seller or buyer of the company.  First, key employees start looking for other jobs, fearing that a new owner may not retain them.  In the uncertainty, customers may begin shopping elsewhere.  Suppliers get nervous.  Competitors can take advantage of the situation.

This is why a prospective business buyer will be asked to sign a non-disclosure confidentiality agreement early in the process of looking at a possible business acquisition. In this agreement, the potential buyer confirms that he/she will not disclose the fact that the business is for sale except to professional advisors.

If you show that you take the need for confidentiality seriously, you will be regarded as the professional that you are.

Critical Issue #2: Valuation

Nothing causes the buyers and sellers of businesses more anxiety than the issue of valuation. The question of selling price haunts both parties. The seller doesn’t want to price his business too low and “leave money on the table.”  On the other hand, the business buyer is afraid he’ll pay too much and not get the best possible price.

Formal, fully documented business appraisals are now readily available.  In addition, there are rules of thumb guidelines that can be used to quickly estimate the value of a business.  As just one example, we know that a full-service restaurant with a liquor license is worth about 30% of its annual gross revenue as an ongoing business.  This assumes – a big assumption – that the company is earning the average bottom line profit for its peer group.

There are rules of thumb guidelines for almost all categories of business from ice cream stands to manufacturing plants.  But again, these guidelines provide only quick estimates.  And written, fully documented business appraisals are now done by several respected national firms at a cost similar to real estate appraisals.

Critical Issue #3: Financing

Financing is always a concern, as hardly any business buyer has the financial capacity to write a check for the purchase price of a business.  If they did, they would likely be living off investment income rather than buying a business.

These are five possible sources for business acquisition loans:

BANKS – Although most people seeking a loan to buy a business will think first of a traditional bank loan, I can tell you from years of business brokerage experience that banks generally do not make business acquisition loans.  There are exceptions, but they’re rare.

SBA – Through its approved lenders, the SBA provides business acquisition loans.  The SBA does not make direct loans, but rather guarantees a portion of the loan that the approved lender makes.   It’s known as the SBA 7(a) program.  Live Oak Bank is currently the top volume SBA lender nationally.

The SBA route for a business acquisition loan is sometimes frustrating because of the time and detail that is involved.  However, keep in mind that the SBA will approve loans that others have turned down and will usually approve them with a smaller down payment.  In most cases, it’s worth the wait.

FAMILY – Many times, the older generation in a family will loan the down payment or the entire amount needed to a promising member of the family’s younger generation.  If your family is willing to loan you the money, one word of advice is in order.  Have a very clear understanding as to how the debt is to be handled and put it in writing in the form of a legal note.

THE SELLER – In a significant percentage of the business transfers that I handle as a business broker, the owner of the business finances a portion of the purchase price for the buyer.  Some sellers cannot offer owner financing for a variety of reasons, but when they can, it conveniently solves the problem of financing.

The fact that the business owner is willing to finance the sale of his company provides more than a convenient finance plan.  More importantly, it provides strong validation of the owner’s belief that the business will support the owner and earn enough cash to pay back the loan.  You can’t get any better recommendation on the business than this.

The normal down payment for owner financing generally ranges from around 30% to 50% of the purchase price of the business.  Interest rates are generally market-driven, but there is more flexibility here than in other forms of financing.

401(K) FUNDS AND IRA ACCOUNTS – The use of these funds to buy a business, without tax penalty, is a fairly recent development.  Several national CPA and attorney groups have developed a plan, approved by the IRS, which allows you to use your funds for business acquisition.  There are legal and accounting fees involved, but they are a small fraction of the tax penalty that would be assessed for cashing in these accounts early.

The above ­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­five sources of financing are not exclusive to each other.  I recently handled a transaction in which three of the five sources were used to buy the business.

It’s called creativity!

To order our complimentary 62-page booklet entitled “How to Buy a Business in a Safe and Organized Way,” please see the ordering information in the upper right area of this page.  To subscribe to this blog and get notices of updates, please find the subscribe button top right.  We will not spam you!

If I can assist you with any considerations involved in the valuation and transfer of ownership, please don’t hesitate to email or call me.

For updates, please subscribe to our newsletter using the button to the right near the top of this page.  We will not spam you!

For further reading, here are additional related articles:

#     #     #

William Bruce is an Accredited Business Intermediary (ABI) and Senior Valuation Analyst (SVA) assisting buyers and sellers of privately held businesses in the transfer of ownership.  He currently serves as president of the American Business Brokers Association.  His practice includes consulting services nationally on issues of business valuation and transfer.   With offices in Fairhope, Alabama and Baton Rouge, Louisiana, he may be reached at (251) 990-5934 (Fairhope), 225-465-5799 (Baton Rouge) or by email at Will@WilliamBruce.org.  The firm’s most recent closings can be viewed here.

 
Posted in Business Valuation & Appraisal, Valuing, Buying or Selling a Business | Tagged , , , , , , , , , , , , , | 26 Comments

An Insider Reveals the Truth About the Small Business-for-Sale Marketplace

Posted on December 2, 2025 by William Bruce

Whether you’re buying or selling a privately held business, or just want to keep up with what’s going on in the market, this article contains timely information on the condition of the business-for-sale marketplace.

The most authoritative source of accurate quarterly information for this private marketplace is the Market Pulse Report, a survey conducted jointly by the International Business Brokers Association and the Mergers & Acquisitions Source.  The membership of both organizations is comprised of full-time professionals in the private business-for-sale marketplace.  The following information is reproduced from the most recent survey of the membership conducted recently for the third quarter of 2025.

The survey studied five market segments by transaction size, ranging from below $500,000 to $50 million, as shown in the chart below.

Highlights From the Survey:

The Generational Transfer of Business Ownership Has Begun

The long awaited sale of Baby Boomer-owned businesses has begun.  The leading edge of this population segment will turn 80 years of age next year.  Many think this expected generational transfer was delayed by (1) Boomers staying healthier and more productive into their senior years, and (2) the recession of 2008-9 plus the COVID crisis of 2020/2021, when valuations plummeted and financing dried up.  In any event, it’s now a significant market consideration.

The circular graph above indicates that almost 60 percent of the business sales in the third quarter were from Baby Boomers.  Boomers were born between 1946 and 1964, a period of high birth rates following World War II. This generation is named for the “baby boom” that occurred in the United States after the war when soldiers returned home and started families.  Today, a still significant percentage of business owners are ageing Baby Boomers.

Multiples of Earnings Valuation Formulas Are Stable

From the chart below, we see that valuation multiples for businesses selling for under $1 million remained relatively steady for the last three quarters.  Mid-market multiples for business transactions between $1 million and $5 million showed a slight improvement.  The over $5 million category showed a small dip in valuation multiples from the previous quarter but was up from the start of 2025.

The earnings metric used for businesses with a market value up to $2 million is Seller’s Discretionary Earnings (SDE), which more accurately reflects the owner’s benefit in most small businesses as compared to the Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA), which is used in this survey for the earnings of companies selling over $2 million.   All told, the privately held business-for-sale valuation environment is stable with no unusual swings in either direction.

Transaction Structure by Size

Sellers rarely receive all cash at close. In the third quarter of 2025, sellers averaged across all size categories 81 to 88 percent cash at close. Historically, average cash at close has remained fairly stable, hovering around the mid-80% range.  Some lenders for business buyers require that the seller hold a note for a small percentage of the selling price.  The graph below breaks down the transaction structure by size.

Who Is Buying and What Are They Buying

The data shows that first-time buyers are more active in the Main Street market, while strategic buyers and private equity firms become more prominent as the transaction size increases.

We can also see a pretty clear story about business expansion strategies. Smaller businesses are typically acquired by first-time business buyers seeking a business of their own, or as horizontal add-ons, where the buyer seeks to expand market share by acquiring a company in the same industry or offering similar products or services. However, once a business reaches a $5 million valuation or higher, that’s when we start to see vertical add-ons come into play, as buyers look to integrate companies within the same supply chain.

And what are they buying?  Overall, this quarter’s M&A activities display a diverse range of industries attracting investment. Personal services and construction remain strong players in the Main Street market, while manufacturing and construction led in the lower middle market.

In Summary

According to this latest survey of professionals with real-time, in-depth knowledge, the business-for-sale marketplace metrics are stable, and the results are within normal quarterly variations.

Author’s disclaimer: William Bruce is a member of both the International Business Brokers Association and the M&A Source.  He participated in this survey.

For further reading, here are additional articles on the issues of business valuation and ownership transfer:

X     X     X

William Bruce is an Accredited Business Intermediary (ABI) and Senior Valuation Analyst (SVA), assisting buyers and sellers of privately held businesses in the transfer of ownership.  He currently serves as president of the American Business Brokers Association.  His practice includes consulting services nationally on issues of business valuation and transfer.   With offices in Fairhope, Alabama and Baton Rouge, Louisiana, he may be reached at (251) 990-5934 (Fairhope), 225-465-5799 (Baton Rouge) or by email at Will@WilliamBruce.org. 

Posted in Business Valuation & Appraisal, Valuing, Buying or Selling a Business | Tagged , , , | Leave a comment

Are You Wondering What the 2025 Economy Will Be Like? Here’s a Quick Summary of the Predictions.

Posted on January 6, 2025 by William Bruce

The economy of the United States ended 2024 in pretty good shape.  Most economists expect the U.S. to build on the gains of 2024 as anxiety over the presidential election wanes, with economic activity growing, and with interest rates continuing to decline.

Officials of the Federal Reserve Bank have conducted the “Blue Chip Survey” of 50 professional economists, asking for their projections for the year ahead.  The economists were asked for their predictions of the rate of growth of the gross domestic product (GDP), inflation, and the unemployment rate.

The results of the survey are summarized below and in the chart that follows:

  • The average of the top 10 forecasts for GDP growth (most optimistic) is 2.5%, while the average of the bottom 10 (most pessimistic) is 1.9%.
  • The average of the top 10 forecasts for inflation is 2.8% while the bottom 10 average is 2.1%.
  • The average of the top 10 forecasts for the unemployment rate is 4.5% while the bottom 10 average is 4.0%.

For the full report of the Blue Chip Survey, please click here.

Other economist have mentioned several things that might negatively affect the U.S. economy in 2025 including retaliatory tariffs tit-for-tat hostilities among global economies, mass deportations of a significant portion of the country’s labor force, major terrorist attacks particularly on American infrastructure, and wider global wars.

On the positive side, a Forbes author wrote that artificial intelligence could boost output per worker in a number of sectors, including healthcare, finance, manufacturing and information technology, adding to the growth of GDP.

Absent any of the negative factors, the year ahead looks like the American economy will move along quite nicely.

On a personal note from my business brokerage office, interest anong business buyers for privately held businesses remains strong.  One economist pointed out that business brokers are usually the first profession to feel the effects of any change in the economy.  If that’s true, my prediction is that 2025 will be a good year for the American economy.

x     x     x

William Bruce is an Accredited Business Intermediary (ABI) and Senior Valuation Analyst (SVA) assisting buyers and sellers of privately held businesses in the transfer of ownership.  He currently serves as president of the American Business Brokers Association.  His practice includes consulting services nationally on issues of business valuation and transfer.   With offices in Fairhope, Alabama and Baton Rouge, Louisiana, he may be reached at (251) 990-5934 (Fairhope), 225-465-5799 (Baton Rouge) or by email at Will@WilliamBruce.org.  The firm’s most recent closings can be viewed here.

Posted in Business Valuation & Appraisal, Gulf Coast Regional & National Economy, National economy, Valuing, Buying or Selling a Business | Tagged , | 1 Comment

EBITDA Valuation Multiples Are Rebounding for Privately Held Businesses

Posted on September 3, 2024 by William Bruce

By William Bruce

This latest information on the EBITDA valuation multiples comes to my office from DealStats Value Index Digest, which is one of our most authoritative resources.

The DealStats database contains the larger transactions where Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) is the preferred metric for valuation purposes.  For smaller transactions, Sellers Discretionary Earnings (SDE) is used more frequently.  For the differences in the EBITDA and SDE metrics, please see our article here.

The average EBITDA valuation multiple across all industries, as reported by DealStats, has increased by 65 percent since its low of 2.9 in the first quarter of 2022.

There are several reasons for this strong rebound, and the two that immediately come to mind include the fact that the most predicted recession in American history for 2022 and 2023 did not happen.  The television “talking head” economists were dead wrong.

The other reason is that interest rates are falling, and the Federal Reserve System has signaled that more decreases will follow.

The graph below from DealStats shows that the average EBITDA valuation multiple across all industries has rebounded nicely from the 6-year low of 2.9 to a 4.8 multiple as of June 30, 2024.

The information is more interesting and meaningful when broken down by business sector, which DealStats has done in the graph below.  The EBITDA valuation multiples among the sectors vary widely, from a 6-year average of 11 times EBITDA in the information sector to a low of 2.5 in the accommodations and food service market.

The valuation multiples in the balance of the business sectors are closer to the 6-year average across all markets as shown below.

For updates, please subscribe to our newsletter using the button to the right near the top of this page.  We will not spam you!

Other articles that may be of interest dealing with business valuation and ownership transfers can be found here in our resource center.

x     x     x

William Bruce is an Accredited Business Intermediary (ABI) and Senior Valuation Analyst (SVA) assisting buyers and sellers of privately held businesses in the transfer of ownership.  He currently serves as president of the American Business Brokers Association.  His practice includes consulting services nationally on business valuation and ownership transfer issues.   With offices in Fairhope, Alabama and Baton Rouge, Louisiana, he may be reached at (251) 990-5934 (Fairhope), 225-465-5799 (Baton Rouge) or by email at Will@WilliamBruce.org.  The firm’s most recent closings can be viewed here.

 

 

Posted in Business Valuation & Appraisal, National economy, Valuing, Buying or Selling a Business | Tagged , , , | Leave a comment

The Critical Importance of Small Businesses to Our Country

Posted on August 26, 2024 by William Bruce

Small businesses are the backbone of America.

By William Bruce

Small businesses are often referred to as the backbone of the American economy, and for good reason. These businesses play a crucial role in fostering innovation, creating jobs, and contributing to the country’s overall economic health.

As a business broker for many years, I’ve had an enjoyable career interacting with many business owners and business buyers.  I’ve learned a lot from these experiences.

So, let’s briefly examine seven ways small businesses are essential to our country.

Job Creation

Job creation is one of the most significant contributions of the small business sector. According to the U.S. Small Business Administration (SBA), small businesses account for 99.9% of all businesses in the United States and employ nearly half of the private workforce.

Surprising, huh?

And this means that millions of Americans rely on small businesses for their livelihoods.  In many cases, small businesses are the primary source of employment in local communities, especially in rural areas where large corporations may not have a presence.

Innovation and Competition

Small businesses are often at the forefront of innovation.  With fewer bureaucratic hurdles and a closer connection to their customers, small businesses can quickly adapt to changing market conditions and introduce new products and services. This agility fosters a competitive environment that actually drives larger companies to innovate as well.

Many of the technological advancements and consumer products we enjoy today originated from small businesses and startups.

Economic Diversification

Small businesses contribute to economic diversification by operating in a wide range of industries. This diversification is crucial for economic stability, as it reduces the risk of economic downturns affecting the entire economy. When one sector faces challenges, others can continue to thrive, providing a buffer against economic shocks.

Small businesses also help to diversify local economies, making communities more resilient to changes in the national or global economy.

In my hometown community, small businesses provide everything from horseback riding lessons to the local favorite of seafood gumbo!

Community Development

Small businesses are deeply embedded in their local communities. They often sponsor local events, support charitable causes, and contribute to the overall quality of life in their areas. By providing goods and services tailored to the needs of their communities, small businesses help to create a sense of place and identity. This local focus can lead to stronger community ties and a more engaged citizenry.

When you “shop local,” you’re supporting these valuable contributions.

Economic Growth

The cumulative effect of small businesses on the economy is substantial. They contribute to GDP growth by generating revenue, paying taxes, and stimulating demand for goods and services. The SBA reports that small businesses create two out of every three new jobs in the private sector, making them a critical driver of economic growth. Additionally, small businesses often reinvest their earnings locally, further boosting economic activity in their communities.

Opportunities for Entrepreneurship

Small businesses provide opportunities for entrepreneurship and economic mobility. They offer a pathway for individuals to turn their ideas and passions into viable enterprises.

This entrepreneurial spirit is a cornerstone of the American Dream, allowing people from diverse backgrounds to achieve financial independence and success. Small businesses also provide opportunities for skill development and career advancement, contributing to a more dynamic and capable workforce.

And remember, all big businesses started as small businesses. Microsoft did not magically materialize as this giant apparition with billions of dollars of income.  As teenagers, Bill Gates and high school classmate Paul Allen started working on computer programming in the Gates family garage.

Adaptability and Resilience

Small businesses have demonstrated remarkable adaptability and resilience, particularly in times of crisis. The COVID-19 pandemic, for example, highlighted the ability of small businesses to pivot quickly, whether by shifting to online sales, offering new products, or finding creative ways to serve their customers. This resilience is essential for the economy’s overall health, as it allows for quicker recovery and sustained growth.

Conclusion

It’s an understatement to say that small businesses are indispensable to the continuing success of the United States as a world economic leader.  They drive job creation, foster innovation, contribute to economic diversification, and play a vital role in community development.  Their impact on economic growth and opportunities for entrepreneurship is huge.

As we look to the future, it is essential to continue supporting and nurturing small businesses in America, recognizing their critical role in building robust and resilient local economies from Georgia to Hawaii and everywhere in between!

x     x     x

William Bruce is an Accredited Business Intermediary (ABI) and Senior Valuation Analyst (SVA), assisting buyers and sellers of privately held businesses in the transfer of ownership.  He currently serves as president of the American Business Brokers Association.  His practice includes consulting services nationally on issues of business valuation and transfer.   With offices in Fairhope, Alabama and Baton Rouge, Louisiana, he may be reached at (251) 990-5934 (Fairhope), 225-465-5799 (Baton Rouge) or by email at Will@WilliamBruce.org. 
Posted in National economy, Valuing, Buying or Selling a Business | Tagged , | Leave a comment

New Gallup Survey Says Most Americans Want to be Their Own Boss

Posted on July 22, 2024 by William Bruce

A new Gallup survey published in June 2024 found that most Americans share the desire to be their own boss. More than six in 10 U.S. adults (62%) say they would prefer to be their own boss, while 35 percent would prefer to work as an employee for someone else.  The full report from Gallup can be viewed here.

In addition, over half of those who want to be their own boss (52%) say they would be willing to accept at least a fair amount of financial risk to do so.  Among “aspiring entrepreneurs,” the risk-tolerant percentage is even higher, at 70 percent of those who are seriously considering starting or buying a business.

The Reasons

Digging further into the survey results reveals that (1) the appeal of being one’s own boss, and (2) having the opportunity to earn more money top the list of reasons why individuals want to become business owners.

Also, four in 10 people say that the desire for a more flexible work schedule is a key reason for wanting their own business. Schedule flexibility is a much more significant driver of entrepreneurial interest for women than men. Fifty-two percent of women who want to start a business list the desire for a more flexible work schedule as one of their main reasons, compared with 38 percent of men who want to start a business.

The Obstacles

While Americans are interested in being their own boss, financial matters remain a barrier for people to overcome when starting or buying an existing business. Aspiring entrepreneurs rate a lack of funding (60%) and concerns about the personal financial risks of going into business (50%) as the biggest challenges they face.

Other concerns cited in the survey were: inflation (33%), needing to learn more about starting or managing a business (33%), lack of confidence that the business would succeed (26%), government regulation (25%), and access to business loans (24%) are also viewed as important challenges by aspiring entrepreneurs.

While the initial capital needed to buy or start a business was the number one barrier mentioned, the office of William Bruce maintains valuable relationships with the top national SBA bank lenders and can usually arrange business acquisition loans for business buyers with only an approximate 15 percent down payment.

 In Summary

Small businesses are a key pillar of the U.S. economy and labor market, and entrepreneurs are critical to creating and sustaining economic activity.  Fifty percent of of all working Americans are employed by small businesses.  Businesses with 20 or fewer employees make up 89 percent of all business entities in the United States.

The importance of the small business component to the American economy cannot be overstated.

For readers considering buying an existing business, here are some additional articles that may be helpful:

How to Find a Good Business For Sale

Here Are the 6 Most Frequently Asked Questions When Buying a Business

Considering Buying a Business of Your Own? What Size and Type is Right for You?

Considering Buying a Small Business? Here’s How to Analyze a Business for Sale

What Are the Sellers’ Discretionary Earnings of a Business?

x     x     x

William Bruce is an Accredited Business Intermediary (ABI) and Senior Valuation Analyst (SVA) assisting buyers and sellers of privately held businesses in the transfer of ownership.  He currently serves as president of the American Business Brokers Association.  His practice includes consulting services nationally on issues of business valuation and transfer.   With offices in Fairhope, Alabama and Baton Rouge, Louisiana, he may be reached at (251) 990-5934 (Fairhope), 225-465-5799 (Baton Rouge) or by email at Will@WilliamBruce.org.  The firm’s most recent closings can be viewed here.

Posted in National economy, Valuing, Buying or Selling a Business | Tagged | Leave a comment

The Federal Reserve Lowers Interest Rates. What Does This Mean?

Posted on June 14, 2023 by William Bruce

Updated October 8, 2024.

Interest rates are in the news.  Last month, the Federal Reserve Bank lowered the Federal Funds Rate by one-half point, which was more aggressive than the predicted quarter point.  The rate is now at 4.75 percent.

In even better news, the Fed has signaled that future rate reductions are likely in a multi-year cycle.  Some respected economists are predicting a rate of 2.9 by the end of 2026.

So what does this mean for individuals and small businesses?  Different and confusing interest rate benchmarks sometimes create bewilderment.

In an effort to add a bit of clarity, the three benchmark interest rates we’ll discuss in this article are (1) the Federal Funds Rate, (2) the average lending rate for bank customers, and (3) the prime rate.

1.  Federal Funds Rate

The Federal Funds Rate, which is mentioned above, is the interest rate at which banks lend money to each other overnight in order to meet the reserve (liquidity) requirements set by the Federal Reserve.  Banks with a surplus of funds can make a few bucks by lending money overnight to other banks that need to boost short-term liquidity to meet federally set minimums.

The Federal Funds Rate is set by, and is a tool used by, the Federal Reserve to implement monetary policy and influence the overall level of interest rates in the economy.

By adjusting the Federal Funds Rate, the Federal Reserve can affect borrowing costs for consumers and businesses, which in turn can influence spending, investment, and overall  economic activity.

Lowering the federal funds rate encourages borrowing and spending, stimulating economic growth, while raising the rate can help combat inflationary pressures by reducing borrowing and spending.

The Federal Funds Rate is, without question, the most important benchmark rate upon which all other interest rates hinge.  Your car loan, your home mortgage, your small business working capital loan, and your return on Certificates of Deposit are all directly related to the Federal Funds Rate.

As this is being written in October 2024, after the half point reduction in September, the Federal Funds rate is 4.75, down from 5.25 percent.

2.  Average Lending Rate

The average lending rate is not an official benchmark, and is used in this article as an attempt to explain what rate you could expect if you walk into your bank to apply for a loan.

At the very least, most banks try to maintain a three percentage point spread above the Federal Funds Rate.  So currently, you could expect to pay 7.75 percent interest, or most likely something a bit north of that.

3.  Prime Rate

The prime rate is the interest rate that commercial banks charge their most creditworthy customers, typically wealthy individuals, large corporations or governmental entities.  This benchmark is sometimes quoted as the “Wall Street Journal Prime.”

In Conclusion

The Federal Reserve System has learned quite a lot in recent decades about successfully managing the United States economy, particularly in the aftermath of the Great Recession of 2008 and 2009.  The Fed’s management skills are much improved today.  Their corrections are timely and more expertly applied.

Interest rates are a key tool in the Fed’s toolbox, which is why we’ve heard so much lately about rates in the current economy.

X     X     X

William Bruce’s undergraduate degree is in economics and he has served as a bank director, which has given him an understanding of how the Federal Reserve System works.  He is an Accredited Business Intermediary (ABI) and Senior Valuation Analyst (SVA) assisting buyers and sellers of privately held businesses in the transfer of ownership.  William currently serves as president of the American Business Brokers Association.  His practice includes consulting services nationally on issues of business valuation and transfer.   With offices in Fairhope, Alabama and Baton Rouge, Louisiana, he may be reached at (251) 990-5934 (Fairhope), 225-465-5799 (Baton Rouge) or by email at Will@WilliamBruce.org. 

Posted in Business Valuation & Appraisal, Valuing, Buying or Selling a Business | 2 Comments

Here’s How to Value and Sell a Manufacturing Business

Posted on April 10, 2023 by William Bruce

Here are the valuation formulas for manufacturing businesses.

Are you considering buying or selling a manufacturing business, or wondering how to value a manufacturing business?  In this article, we’ll discuss how to value and sell a manufacturing business.

Manufacturing is a broad category of many business types covering myriad finished products.  This mix produces difficulty in determining how to value a specific manufacturing business.

The valuation of privately held, small to medium size businesses is not an exact science.  But fortunately, resources are available to valuation specialists to help reach a conclusion of market value for manufacturing businesses.

All of the manufacturing business valuation formulas we’ll quote here are based on the opinions of industry experts and averages derived from completed sales of manufacturing businesses reported to national databases.

One respected authority reports that manufacturing businesses – in general – will appraise on average between 3 to 4 times Seller’s Discretionary Earnings (SDE), or 3 to 5 times Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA).  But again, these are only broad averages among many different manufacturing categories.

For a definition of Seller’s Discretionary Earnings (SDE) and Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA), please see this article.

Now for some valuation multiples from respected authorities on specific manufacturing categories:

  • Aluminum Extruded Products – 6 times Seller’s Discretionary Earnings (SDE).
  • Blinds & Window Shade Products – 3 times SDE, 5 times EBITDA.
  • Chemical Products – 4 to 9 times EBITDA
  • Cosmetic & Beauty Products – Under $1 million in annual revenue = 3 times SDE, over $1 million in revenue = 5 times EBITDA.
  • Concrete Pipe & Block Products – 6 times EBITDA.
  • Food Products – 4 to 7 times EBITDA.
  • Furniture for Households and Institutions – 4 to 7 times EBITDA.
  • Glass Products – 2 to 3.5 SDE.
  • Metal Fabrication – 3 to 5 times SDE, 4 to 6 times EBITDA.
  • Paint Products – 3 to 5 times SDE.
  • Plastic Bottles – 3 times SDE.
  • Pre Fabricated Wood Buildings – 3 to 4 times SDE.
  • Screws, Nuts & Bolts – 8 to 11 times SDE.
  • Signs – 3 to 5 times SDE.
  • Women’s Apparel – 3 to 11 times EBITDA depending on size.
  • Wood Kitchen Cabinets – 2 to 3 times SDE.

If the type of manufacturing business you’re interested in is not listed above, contact me.  I’ll most likely be able to find it in our resources.

If real estate is being sold with the business, its value should be added to the results obtained from the above formulas.

And at the risk of being repetitive, the above-quoted earnings multiples are averages within each manufacturing business type.  Many factors impact the valuation of a particular company, including:

  • The revenue and earnings trend of the business.
  • The company’s dependence on the owner and his/her willingness to assist in the transition.
  • Customer concentration.  Do one or a few customers account for an unusually high percentage of the company’s revenue?
  • The upcoming need for any capital expenditures.
  • Are trained employees likely to stay with a new owner?
  • Any patents or unique technologies owned by the company.
  • And perhaps most important is the “reality check.”  This check makes sure the business is producing enough cash flow yearly to (1) cover the debt service on the loan that the buyer will use to buy the business, (2) pay the owner a living wage, and (3) produce a decent rate of return on the new owner’s investment.

The above issues will determine where within the quoted valuation ranges a specific manufacturing business will fall.

Once you have a good estimate of the business’s worth, it’s time to engage your professional team. Our firm has been offering business valuation and ownership transfer services since 1986. If we can assist you with these issues, please don’t hesitate to contact us.

For further reading, here are additional related articles:

#     #    #

William Bruce is an Accredited Business Intermediary (ABI) and Senior Valuation Analyst (SVA) assisting buyers and sellers of privately held businesses in the transfer of ownership.  He currently serves as president of the American Business Brokers Association.  His practice includes consulting services nationally on issues of business valuation and transfer.   With offices in Fairhope, Alabama and Baton Rouge, Louisiana, he may be reached at (251) 990-5934 (Fairhope), 225-465-5799 (Baton Rouge) or by email at Will@WilliamBruce.org. 

Posted in Valuing, Buying or Selling a Business | Tagged , , | Leave a comment

Selling a Business? Ask These 5 Questions to Separate Serious Buyers From Tire Kickers

Posted on April 5, 2023 by William Bruce

A serious buyer or a tire kicker?

If you are selling a business, it’s critical to distinguish a legitimate prospective buyer from a tire kicker.  And as a business broker for over 30 years, I can tell you that there are a lot of tire kickers out there, also known as coffee shop gossips.

The Deal Studio division of Business Brokerage Press recently published an excellent article on the problem.  The author explains that the answers to five questions will give you good clues as to whether you’re dealing with a serious buyer or an energy-sapping pretender.

To read this valuable article, please click here.

For further reading, here are additional related articles:

#     #     #

William Bruce is an Accredited Business Intermediary (ABI) and Senior Valuation Analyst (SVA) assisting buyers and sellers of privately held businesses in the transfer of ownership.  He currently serves as president of the American Business Brokers Association.  His practice includes consulting services nationally on issues of business valuation and transfer.   With offices in Fairhope, Alabama and Baton Rouge, Louisiana, he may be reached at (251) 990-5934 (Fairhope), 225-465-5799 (Baton Rouge) or by email at Will@WilliamBruce.org. 

Posted in Valuing, Buying or Selling a Business | Tagged | 1 Comment

Why Some Small Businesses Don’t Sell

Posted on January 10, 2023 by William Bruce

Five reasons why some small businesses don’t sell

As a business broker for over 35 years, I’m often asked why some small businesses don’t sell.  It’s a sad situation when a business owner reaches retirement and can’t find a buyer for their business.  Too many times, they just wind up closing the doors.

Walking away with nothing after years in business can be avoided by understanding the reasons why some small businesses don’t sell.  And here we’re defining small businesses as those with annual revenue up to $10 million.

From my experience of over three decades in the marketplace, the following five are the most frequent reasons why some small businesses don’t sell:

Unrealistic Price Expectations

This is probably the number one reason for the failure of a business to sell.

As a personal analogy, when my wife and I were young and welcomed our third child, we decided we needed a bigger home.  This involved putting our smaller home on the market.  We had made some improvements to the home and thought it was worth a lot more than the real estate agent did.  We quickly learned that the market sets the price, not the two of us!

So if you don’t take anything else away from this article, when you start thinking about selling your business, get a professional valuation done.  It will save you a lot of time and grief.

Sloppy Books & Records

I can tell you that missing or sloppy books and records make business buyers suspicious and are another reason why some small businesses don’t sell.   So get those delinquent tax returns filed and work with your accountant to get all your other records cleaned up.

It is not a deal killer if you’ve been running some “unnecessary” expenses through your business to lower Uncle Sam’s tax bite.  Those “discretionary” expenses can be adjusted out in an exercise called recasting to show the true cash-producing ability of your business.

Lack of Proper Representation

I’ve been involved in too many transactions which were torpedoed by absent or inexperienced representatives.  Make sure you have your professionals lined up:

  1.  A business lawyer.  Your lawyer should be very experienced in the business buy/sell arena.  A plaintiff injury television lawyer is not the one you want!
  2. Your accountant.  He/she will need to advise you on the tax consequences of selling your business.
  3. An experienced business broker.  Make sure your broker is credentialed and experienced with knowledge of your business type.  A business broker can be invaluable in this process from start to finish.  But hey, I’m prejudiced!  That’s the enjoyable way I’ve made my living for many years.

Negligible Earnings

If the business is losing money, it really has no ongoing business value.  Speaking frankly, it’s worth only the depreciated value of the tangible assets of furniture, fixtures, and equipment.

However, if there is a reasonable opportunity to turn the business around with additional working capital, marketing savvy, or by other means, it may have some value to a few buyers.

Lack of Acquisition Financing

This issue follows the one above concerning negligible earnings.  If a business is not making a profit, no lender will make a business acquisition loan to anyone to purchase a company that’s losing money.

There are other reasons, also, that financing may not be available.  This could involve the type of business, a declining overall market for the company’s products or services, or the macroeconomic cycle.

In some situations, if the seller is sure of the buyer and the viability of the business, seller financing, after a significant down payment, might be the only way to transfer ownership of the company.  But make sure you, as the seller, are fully aware of the risks.

In Summary

For what it’s worth, you can take my 35 years of experience in this field – with the bruises to prove it – as a real world view of the business sales process and the reasons why some small businesses don’t sell.  But the flip side is that, with planning, most of these problems are avoidable.

Here are other articles that delve into some of these issues in greater detail:

#     #     #

William Bruce is an Accredited Business Intermediary (ABI) and Senior Valuation Analyst (SVA) assisting buyers and sellers of privately held businesses in the transfer of ownership.  He currently serves as president of the American Business Brokers Association.  His practice includes consulting services nationally on issues of business valuation and transfer.   With offices in Fairhope, Alabama and Baton Rouge, Louisiana, he may be reached at (251) 990-5934 (Fairhope), 225-465-5799 (Baton Rouge) or by email at Will@WilliamBruce.org. 

Posted in Business Valuation & Appraisal, Valuing, Buying or Selling a Business | Tagged | 2 Comments

Selling Your Business? Be Aware of the Differences in a Financial Versus a Strategic Buyer.

Posted on July 6, 2022 by William Bruce

Knowing the differences between financial and strategic buyers can be critical in the sale of a business.

In selling a business, it’s critically important to know the motivations of a prospective buyer.  Often this boils down to determining whether the prospect is a financial or a strategic buyer.

Getting the sale of the business to the closing table is sometimes difficult, but the process can be facilitated if you’re able to successfully speak the language of either the financial or the strategic business buyer.

So let’s briefly examine each type.

The Financial Buyer

As the name suggests, the financial buyer will be looking most importantly at the financial returns that the acquisition might offer.

This type of buyer could be an individual, or in the larger transactions, a venture capitalist, a private equity group, a family office, or similar entities.

Financial buyers are seeking stand-alone businesses with cash-producing capability and the capacity for growth of bottom line profits.

Individual financial buyers are usually planning on making a career out of running the business.  In the larger acquisitions, the financial buyer may be focused on a five to seven-year plan in which they grow the company’s earnings and then sell the business at a significant profit.

The Strategic Buyer

This type of business buyer will usually be an operating company that is looking for synergies that the acquisition will bring to the operation.

For example, strategic buyers may be seeking opportunities for new product lines within the same industry, finding new geographical markets, or securing additional channels of distribution.

Strategic buyers focus a bit less than the financial buyer on the current earnings of the target company, but rather are more interested in the integration capabilities and the long-term possibilities for value creation that the acquisition will provide.

In Summary

Identifying the type of buyer and being able to speak to the differing motivations of each can be critical to smoothing out the sometimes difficult path to the closing table in the successful transition of a business.

In dealing with a financial buyer, be able to talk about profits and the possibilities of boosting earnings through increasing revenue and/or decreasing expenses.

When talking to strategic buyers, discuss product lines, customer base, geographic markets, and staffing expertise.

In short, know the difference and be able to talk the language or each.  That will go a long way!

Here are some other articles that might be of interest:

The Top 3 Issues Involved in Buying or Selling a Business

Selling a Business: The Critical Question of Price

What Are the Differences Between EBITDA and Seller’s Discretionary Earnings (SDE)?

x     x     x

William Bruce is an Accredited Business Intermediary (ABI) and Senior Valuation Analyst (SVA) assisting buyers and sellers of privately held businesses in the transfer of ownership.  He currently serves as president of the American Business Brokers Association.  His practice includes consulting services nationally on issues of business valuation and transfer.   With offices in Fairhope, Alabama and Baton Rouge, Louisiana, he may be reached at (251) 990-5934 (Fairhope), 225-465-5799 (Baton Rouge) or by email at Will@WilliamBruce.org. 

Posted in Valuing, Buying or Selling a Business | Tagged , , , | 1 Comment