Top 3 Issues Involved When Buying or Selling a Business

Updated February 21, 2017

By William Bruce

America is a nation of small business owners.  In fact, there are over 22 million of us.

Why do people want to go into business for themselves?  In surveys done several years ago, the number one response was the potential for higher income.  But now in the most recent survey, the top reason was “control of one’s own destiny.”  The change is most likely a reaction to the recent economic times.

More and more individuals are now viewing small business ownership as a viable alternative to the vagaries of corporate America.  As a friend said recently, “There is no more job security.  The only job security you’ve got nowadays is the person looking at you in the mirror.”

As a business broker, I’m often asked about the issues involved in buying or selling an existing  business.  In my opinion, these are the top three issues:

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 business.  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.

2. Valuation

Nothing causes the buyers and sellers of businesses more anxiety than the problem 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 buyer of the business 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 rule 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 liquor license is worth about 30% of its annual gross revenue as an ongoing business.  This assumes – big assumption – that the business is earning the average bottom line profit for its peer group.

There are rule 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.

3. Financing

The toughest problem facing business buyers and sellers in recent years has been financing.  No question about it.

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 – The SBA, through its approved lenders, provides business acquisition loans.  The SBA does not make direct loans, but rather guarantees a portion of the loan that is made by the approved lender.   It’s known as the SBA 7(a) program.  Wells Fargo 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 the majority 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 a 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 ranges generally 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!

For further reading, here are additional related articles:

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William Bruce is an Accredited Business Broker and Appraiser assisting buyers and sellers of privately held businesses in the transfer of ownership.  His practice includes consulting services nationally on issues of business valuation and transfer.  He currently serves as president of the American Business Brokers Association.  He may be reached at (251) 990-5934 or by email at Will@WilliamBruce.org.  His business brokerage website may be viewed at www.WilliamBruce.net.
Posted in Business Valuation & Appraisal, Buying or Selling a Business | Tagged , , , , , , , , , , , , , , | 16 Comments

Number of Small Business Transactions Hits Record Levels in First Half of 2017, Key Financials Continue Upward Trend

 BizBuySell.com, the Internet’s largest business-for-sale marketplace, reported recently a record number of businesses changing hands in the second quarter of 2017.

A total of 2,534 closed transactions were reported in the second quarter of 2017, a 31 percent increase from this time last year.  This brings the year-to-date total to 4,902 closed transactions. If this pace holds up, 2017 highest volume year on record.

Businesses sold in the second quarter grossed a median revenue of $490,000, an 11 percent increase over the same period last year. Median cash flow also increased 10.5 percent year-over-year to $116,000.  Selling price as a multiple of cash flow increased to 2.34, while the average multiple of revenue remained steady at .62.

“Our recent conversations with brokers and previous research shows both buyers and sellers are confident in today’s business-for-sale environment,” said Bob House, president of BizBuySell.com and BizQuest.com.  “This streak of record-number transactions confirms this sentiment and suggests many are capitalizing on today’s hot market.”

Moving into the second half of 2017, all signs point to continued growth in the business-for-sale market. Newly-listed businesses boast growing median revenues and cash flows, suggesting there’s still a strong supply of healthy businesses available.

“The latest quarterly data indicates the business-for-sale market is in great shape,” House said.  “Barring unforeseen factors, we anticipate 2017 will set a new record for the number of businesses sold in a single year since we started reporting on this data in 2007.”

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William Bruce is an Accredited Business Broker and Appraiser assisting buyers and sellers of privately held businesses in the transfer of ownership.  His practice includes consulting services nationally on issues of business valuation and transfer.  He currently serves as president of the American Business Brokers Association.  He may be reached at (251) 990-5934 or by email at Will@WilliamBruce.org.  His business brokerage website may be viewed at www.WilliamBruce.net.

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What is Business Intellectual Property? How Do You Value It?

As a business appraiser and intermediary in the sale, merger and acquisition of privately held companies, I’m often asked about intellectual property.

Intellectual property is something originally created in the mind.  Among other things, it can be an invention, a  written manuscript, a piece of art or a company logo including words, phrases and images used in business.

Some experts in intellectual property break it down into four categories: copyrights, trademarks, patents and trade secrets.

A copyright is a person’s or company’s exclusive right to reproduce, publish, or sell his or her original work of authorship (as a literary, musical, dramatic, artistic, or architectural work).  The ownership right is protected by law.

A trademark is a distinctive design, graphics, logo, symbols, words, or any combination of these that uniquely identifies a company and gives the owner the legal rights to prevent its unauthorized use.

A patent is a right granted to an inventor by the federal government that permits the inventor to exclude others from making, selling or using the invention for a period of time.

In general, a trade secret is any confidential business information which gives a company a competitive edge.  Legal protection for owners of trade secrets is available but murkier than for the other categories.

How do you place a value on intellectual property?

It’s not easy but I’ll tell you how I do it to get fairly close.  When I’m appraising an on-going business entity, I’ll determine the total market value of the business by using industry-specific valuation formulas, sold comparables and other methods.  Then I’ll subtract from that total market value the (1) inventory at cost, (2) the furniture, fixtures and equipment at used replacement value, and (3) the value of any other tangible assets.

The remaining balance is the company’s goodwill value which may include intellectual property.  However, be aware that goodwill can include other items in addition to the intellectual property.  Such things as company reputation, trained employees and a loyal customer base are also part of the goodwill of the business.  For an article explaining goodwill in more detail, please see “What is Business Goodwill.”

For further reading, here are additional articles that may be of interest:

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William Bruce is an Accredited Business Broker and Appraiser assisting buyers and sellers of privately held businesses in the transfer of ownership.  His practice includes consulting services nationally on issues of business valuation and transfer.  He currently serves as president of the American Business Brokers Association.  He may be reached at (251) 990-5934 or by email at Will@WilliamBruce.org.  His business brokerage website may be viewed at www.WilliamBruce.net.
Posted in Buying or Selling a Business | Tagged , , , | 2 Comments

Family Businesses Are Now Less Likely to be Passed on to the Next Generation

Family businesses ownership trends are changing.

A recent survey reports some interesting results including changes in current owners’ intentions regarding ownership transfers.  The survey was done by PricewaterhouseCoopers.  The full results can be reviewed at 2017 US Family Business Survey.

According to the survey, 83 percent of family firms do not plan to change hands in the next five years.  However, the most surprising result of the survey is that among family-owned businesses contemplating a transfer of ownership within the next five years, only about half of the owners plan to pass the business on to the next generation of the family. This is down from 74 percent two years ago and is the lowest percentage in 17 years.

One possible explanation for the dramatic drop addressed in the survey is the increasing difficulty of formulating a succession plan for small to medium-sized family businesses.

The longevity of family firms depends on sound succession planning.  Companies that have made it to the third generation are much more likely to have a succession plan than younger firms.  In fact, the survey reports that 75 percent of third generation and beyond ownership have a plan for succession.

Other survey results:

  • 11 percent of family firms plan to diversify
  • 29 percent plan to expand internationally
  • 21 percent say innovation is a priority
  • 64 percent of family firms say they are more entrepreneurial than other type firms
  • 52 percent of firms say they reinvent themselves with each generation
  • 75 percent of first and second generation firms say they will give men and women equal opportunity for leadership.  With third generation and beyond, the result is 57 percent.

Our office specializes in services to family firms and offers assistance in succession planning.  Please contact us if we might be of assistance.

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William Bruce is an Accredited Business Broker and Appraiser assisting buyers and sellers of privately held businesses in the transfer of ownership.  His practice includes consulting services nationally on issues of business valuation and transfer.  He currently serves as president of the American Business Brokers Association.  He may be reached at (251) 990-5934 or by email at Will@WilliamBruce.org.  His business brokerage website may be viewed at www.WilliamBruce.net.
Posted in Buying or Selling a Business | Tagged , , , | 2 Comments

The U.S. Senate Race in Alabama: My Thoughts on the Candidates.

The deadline for qualification has passed and we now have a slate of eleven candidates in the Republican primary.  There is little doubt that Alabama’s next senator will come out of the Republican primary in a state where the Democratic Party is irrelevant in statewide elections.

The special election is to fill the seat of Jeff Sessions who resigned to become U.S. Attorney General.

So for what it’s worth, here is my characterization of the candidates, in alphabetical order:

JAMES BERETTA  –  A Rhode Island native currently practicing osteopathic medicine as a pain management doctor in the Birmingham area.

JOSEPH BREAULT  –  Unknown.  All anyone knows is that he paid the $3,480 qualifying fee.

RANDY BRINSON  –  An online Google search reveals he was head of some kind of religious organization.

MO BROOKS  –  Current North Alabama Congressman.  Smart guy who graduated in three years “with highest honors” from Duke.

DOMINIC GENTILE  –  Owns a janitorial service business in Birmingham.

KAREN JACKSON  –  Unknown.  A $3,480 egotistical folly?

MARY MAXWELL  –  Unknown.    Ditto.

ROY MOORE  –  Former Chief Justice of the Alabama Supreme Court, twice removed from office for improper conduct on the bench.  Additionally, he’s had two failed runs for governor.

BRYAN PEEPLES  –  Who?

TRIP PITTMAN  –  Baldwin County businessman and a member of the Alabama State Senate.  Qualified to run only hours before the deadline and only after fellow State Senator Del Marsh declined to run.

LUTHER STRANGE  –  Tainted, tainted, tainted.

As I view the election at this early stage, it’s a three-man race between Luther Strange, Roy Moore and Mo Brooks to get into the two-man runoff.  Trip Pitman might possibly be in the mix depending on his fundraising prowess.

The first primary voting will be on August 15 and the runoff will be September 26.

Luther Strange is so tainted by the smelly Bentley appointment that I believe it’s possible that he will not even make the runoff despite the millions of dollars available to him from Washington as the “incumbent.”  This would be amusing.

Roy Moore has a solid core of supporters among Alabama Republican voters amounting to about 30% of the electorate.  But he’s been mostly unsuccessful in expanding that base.  His core base gives him a good chance of making the runoff in the senate race, but if he does, I suspect he’ll get beat in the two-man faceoff.

To have a chance, Trip Pittman needs money to establish name identification outside of Southwest Alabama.  With money, he could be a dark horse contender.

The man to watch, in my opinion, is Mo Brooks.  He’s very bright, quick on his feet, and can often turn a memorable phrase.  He’s already talking about “swamp critters.”

And Brooks is the guy who made a fool out of MSNBC reporter Contessa Brewer during an interview.  Reporter Brewer mistook a southern accent for ignorance.  As Mo Brooks was trying to explain his stand on budget issues, she mockingly asked if he had a degree in economics.  His answer placed scrambled eggs all over the reporter’s face.  The amusing exchange can be viewed here: https://www.youtube.com/watch?v=5mtQyEd-zS4.

Anyway, stay tuned.  It should be interesting.

Posted in Mobile, Fairhope & Gulf Shores, Alabama | Tagged , , , , , , , , , , , | 2 Comments

Record Number of Small Businesses Sold in First Quarter of 2017

BizBuySell.com, the Internet’s largest business-for-sale marketplace, reported recently a record number of first quarter sold business transactions in early 2017.

A total of 2,368 closed transactions were reported in the first quarter of 2017, a 29 percent increase from this time last year. Though the spike in small business transactions may be partly due to a rush of buyers and sellers looking to close deals around the New Year, a healthy economy, strong small business financials, and access to financing are also enticing more buyers and sellers to the market.

Businesses sold in the first quarter grossed a median revenue of $518,159, an 8.4 percent increase the first quarter of 2016.  Median cash flow also increased, up 6.6 percent year-over-year to $117,275.  These key financial indicators are the highest totals since BizBuySell first started tracking data in 2007.

“After a record-setting year of small business transactions in 2016, it’s great to see continued small business growth in early 2017,” said Bob House, president of BizBuySell.com and BizQuest.com. “Not only are more small businesses changing hands, but healthy financials are positioning these new owners for continued success. While the number of business transactions may stabilize throughout the remainder of the year, all signs point to a bright future for small businesses overall.”

Over the past few quarters, the number of small businesses listed for sale has steadily increased. That trend carried over into 2017 as total listings increased 3.8 percent from last year. These newly-listed businesses boast growing median revenues and cash flows, suggesting there’s still a strong supply of healthy businesses available for interested buyers. Baby Boomers looking to capitalize on today’s favorable conditions and exit small business ownership for retirement are fueling the market supply. At the same time, younger buyers are finding attractive, healthier businesses for sale with greater access to lending, again pointing to a well-balanced market.

“While we anticipate transaction levels should stabilize over the next few months, all small business indicators point to a healthy market for buying and selling in 2017,” said Bob House. “A strong supply of attractive listings and qualified buyers, and an administration looking to reduce costs for small businesses should fuel the market over the upcoming months.”

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William Bruce is an Accredited Business Broker and Appraiser assisting buyers and sellers of privately held businesses in the transfer of ownership.  He participated in this survey by BizBuySell.com.  His practice includes consulting services nationally on issues of business valuation and transfer.  He currently serves as president of the American Business Brokers Association.  He may be reached at (251) 990-5934 or by email at Will@WilliamBruce.org.  His business brokerage website may be viewed at www.WilliamBruce.net.
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Selling a Business: Here’s How to Successfully Meet with a Prospective Buyer.

business-meetingPrevious articles have discussed the importance of having a good reason for selling your business, getting the business ready for salesetting the right asking pricetaking your business to market and buyer acquisition financing.  In this article, we will share some advice on how to successfully hold the first face-to-face meeting with a prospective buyer of the business.

The meeting with a prospect is extremely important.  It’s your chance to put the prospect at ease and show off the business in its best light.

You will probably want to schedule the visit after hours so as not to arouse any suspicions among your employees.  Or, you can schedule the meeting in your broker’s office if for some reason you don’t want to host it in your business.  However, I think it best, if possible, to hold the meeting at your location.  It gives the prospect a better feel for your operation.  If you are using a business broker, he will arrive with the prospect, make the introductions and facilitate the meeting.

The first meeting is sort of a “look see” for both parties.  The prospect is checking out you and the business while you are sizing him up.  It’s important to remain cordial and open.

The ideal meeting will go something like this:

  • First, you welcome the prospect into your office and make sure everyone has a chair and is comfortable. (Of course, it goes without saying that you have cleaned up the place and thrown away all of the old Dominoes Pizza lunch boxes!)
  • It’s usually best after the initial get acquainted chitchat, to give the prospect a brief history of your business and a succinct description of your current operation. (You might want to even practice this presentation to make sure you cover the important points without rambling.  If you’re using a broker, he will be with you and will help guide the meeting.)
  • Remain friendly and informal, call the prospect by name often, and ask periodically if the prospect has any questions. Answer any questions openly and honestly.
  • Be enthusiastic. Point out how much fun you’ve had running the business.  Let the prospect hear and feel how he could experience the same enjoyment you have.
  • As the meeting in your office winds down, offer the prospect a tour of your facility. Give this tour some thought beforehand, so that you can address the points that you want to during the walk-thru.  Point out anything that will help clarify any points you make in the meeting in your office.
  • As the meeting ends, you say something like this, “Well thanks for coming out and taking a look. You’ll probably have some additional questions, so don’t hesitate to get back in touch with me (or Mr. Broker if you’re using one).  I know this will be a big decision for you and we have nothing to hide, so just let me know what I can do to assist you with the process.”   Put these thoughts into your own words and they will leave a favorable impression in the prospect’s mind.

From the “school of hard knocks,” I can also give you some advice on things you DON’T want to do in the initial meeting with a prospect:

  • Don’t overcomplicate your business. Simplify it.  Don’t make it sound like the management of the company is so specialized that only a brain surgeon can do it.  I’m being facetious of course, but be careful not to scare off the prospect by planting the doubt in his mind that he would not be capable of running your business.
  • Don’t hide any problems. If there are any problems with the business, get them out up front.  There is never a better time to get any problems out on the table than in the meeting.  (See discussion below.)
  • In the initial meeting, it’s usually best to stay away from price and terms. If the prospect brings it up, just say, “My broker here has all of that information and if your will, get with him on that later.”

The importance of getting any problems out in the open up front cannot be overemphasized.  It’s partly a psychological issue.  If you bring up a problem in the beginning and discuss it openly, the importance of that problem is minimized in the prospect’s mind, compared to having it pop up unexpectedly later in the process.

For example, let’s say there is a tax lien against your business for unpaid payroll withholding taxes.  If you bring it up initially by saying something like, “By the way, I do want to mention for the sake of being completely open and honest that we have a tax lien against the business which is being taken care of (or which will be taken care of at closing) so that you will buy all of the assets of the business free and clear without any liens or other encumbrances.”

When you mention it like this, you win points for honesty and openness and it minimizes the problem.  I’ve seen many transactions fall apart when such problems are not disclosed and are later discovered by the prospect.  When discovered later – as they always are – the problem will usually “torpedo” the transaction.

This is such an important point that it bears repeating: DON’T HIDE ANY PROBLEMS.  TALK ABOUT THEM IN THE BEGINNING!

Now that I’ve been overly redundant, let’s move on.  The next article will discuss how to handle written offers to purchase the business.

For further reading, here are additional related articles:

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William Bruce is an Accredited Business Broker and Appraiser assisting buyers and sellers of privately held businesses in the transfer of ownership.  His practice includes consulting services nationally on issues of business valuation and transfer.  He currently serves as president of the American Business Brokers Association.  He may be reached at (251) 990-5934 or by email at Will@WilliamBruce.org
Posted in Buying or Selling a Business | Tagged , , , , | 2 Comments

Record Number of U.S. Small Businesses Were Bought and Sold in 2016

sale-of-businessBizBuySell.com, the Internet’s largest business-for-sale marketplace, reported recently
that annual small business transactions reached record levels in 2016, topping 2015’s totals by 8.6 percent.

The results are included in BizBuySell’s annual Insight Report, which aggregates statistics from business-for-sale transactions reported by participating business brokers nationwide.

A total of 7,842 closed transactions were reported in 2016, the highest yearly total of small business sales since BizBuySell first started tracking data in 2007.  Primary factors cited for the reported growth include (1) an improving small business environment, (2) more owners looking to sell, (3) more qualified buyers on the market and (4) better financing options.

Included in the total number of businesses reported sold were 17 businesses that changed hands in Birmingham, Alabama at an average selling price of 3.15 times cash flow, also referred to as discretionary earnings.  There were 93 transfers reported in New Orleans with an average selling price of 3.12 times cash flow, and 207 sales recorded in Nashville with an average valuation multiple of 2.64.

Interestingly, the highest average valuations expressed as multiple of discretionary earnings were reported in North Carolina.  The lowest were in Connecticut.

“After several years of strong business-for-sale activity, it is great to see even more growth in 2016,” Bob House, President of BizBuySell.com said. “Not only are more small businesses changing hands, but healthier businesses put the new owners in a great position for continued success. This bodes well for the market, but also points to a bright future for small businesses overall.”

With a record number of Baby Boomers retiring from business ownership and buyers attracted to stronger financials and an increasing number of millennials looking to enter small business ownership, signs point to a well-balanced market.

“Overall, small business indicators point to a healthy market for buying and selling in 2017,” House said. “Although there will certainly be issues to watch under the new Trump administration, as long as small business financials continue to improve and a steady supply of listings enter the market, transaction activity should continue its momentum well into the new year.”

Author’s full disclosure: William Bruce participated in this survey as a business sales, mergers and acquisitions adviser reporting completed transactions in which he was involved to BizBuySell.

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William Bruce is an Accredited Business Intermediary and Appraiser assisting buyers and sellers of privately held businesses in the transfer of ownership.  His practice includes consulting services nationally to business owners and buyers.
He currently serves as president of the American Business Brokers Association.  He may be reached at (251) 990-5934 or by email at Will@WilliamBruce.org.
Posted in Business Valuation & Appraisal, Buying or Selling a Business | Tagged | 2 Comments