The 3 Most Critical Issues in Buying or Selling a Business

Posted on April 7, 2020 by William Bruce

Updated April 8, 2022

Top 3 issues in buying or selling a business.

These are the top 3 issues involved in 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

Whether you’re buying or selling, click here to see how a business broker can help you do it right.

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.

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 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 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 – big assumption – that the business 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 most likely be living off of 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 – 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 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 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!

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 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 401(k) used for business purchase, American Business Brokers Association, business acquisition loan, business appraisal valuation, business broker, buying a business, IRA 401k used for buying a business, SBA 7a, SBA loan, selling a business, Small Business Administration, Sunbelt Business Brokers, Wells Fargo, William Bruce Business Broker | 24 Comments

The Condition of the Private Business-for-Sale Marketplace From Insiders

Posted on October 2, 2023 by William Bruce

The William Bruce Report: The Condition of the Private Business-for-Sale Marketplace is a quarterly disclosure of national market conditions from insiders who are professional advisors to business buyers and sellers. William Bruce, the author of this report, currently serves as president of the American Business Brokers Association.

Because the small to medium-sized business-for-sale marketplace is comprised of non-public, closely held businesses with little public reporting required, information is often difficult to obtain.

One authoritative source of quarterly information for this marketplace is the Market Pulse survey conducted jointly by the International Business Brokers Association and the M&A Source. The membership of both organizations is comprised of full-time professionals in the private business-for-sale marketplace.

The 2023 second quarter survey was conducted July 1-16, 2023, and was completed by 413 business brokers and M&A advisors. Respondents completed 347 transactions this quarter. This is the 45th edition of the survey.

Notable findings from the survey include:

Greater Interest from PEGs and Individuals

Anecdotal evidence suggested advisors were fielding greater interest from private equity groups (PEGs) as well as individual buyers alike. Interest appears to be peaking among former C-suite individuals who generally have the net worth, the professional network, and the capabilities to consider business ownership. This quarter’s survey investigated that trend.

“We know pretty clearly what’s driving PEG activity in the Main Street and lower middle markets,” said Kyle Griffith, Managing Partner of The NYBB Group. “Increased demand for deals has many of these buyers moving down market to reduce competitive pressure. And the lending climate is such that it’s easier for these groups to find financing for smaller deals right now. Private equity will consider almost any deal size for a strategic add-on acquisition.”

Lending Environment Remains a Challenge

A question on the lending environment revealed widespread concern among respondents. Across all value segments, the majority (57-58%) perceived the lending climate to have worsened from Q1 to Q2 this year. Only a small percentage (3-4.5%) reported an improvement in lending conditions, indicating caution and potential obstacles for businesses seeking financing in the current market.

Business Value

Business valuations held steady in the Main Street market. Looking at the last three quarters, we see a stable trend. However, Q2 2023 median multiples in the $5-50MM enterprise value are down (Figure 6), year-over year, suggesting interest rates or other
factors are affecting the market as well as a rebound in the $2-5MM enterprise values. Buyers are paying much more in interest now. Thus, they either bought at a lower price or accepted smaller returns, and right now the lower price appears to be winning.

“The data indicates there has been some multiple compression in Q2
which is not unexpected. When interest rates rise, valuations are
negatively affected at some level,” said Scott Mashuda, an Ohio-based mergers and acquisitions advisor for larger transactions. “However, we expect the decline to be modest and short lived as large amounts of investable capital remain on the sidelines, ready to be put to work. This demand driven market should keep markets and valuation strong for the foreseeable future.”

Time to Close

The average time to sell a small business increased across most sectors, with a significant jump for businesses valued at $5 million or more. Of that time, roughly 60 to 120 days are spent in due diligence and execution after a signed letter of intent or
offer.

“The delays in the lower-middle-market can be almost entirely attributed to the current lending climate,” said Eric Gall, President and Founder of Edison Business Advisors. “Buyers are having to work much harder to pull together the money they require to complete a transaction.”

The Buyers

The data shows that first-time buyers are more active in the Main Street market, while strategic buyers and PE firms become more prominent as the transaction size increases. Buyer motivations also shift, with a focus on job acquisition in the lower value ranges and an increasing emphasis on strategic expansion in the higher value segments. Additionally, location preferences appear to shift with business values, suggesting that proximity to sellers may be more critical for smaller transactions.

<$500,000: Buyers in this sector were:
• First-time buyer (47%), or serial entrepreneurs (37%)
• Motivated to buy a job (42%), gain a horizontal add-on (23%)
• Located within 20 miles (64%) or more than 100 miles (16%) of the seller’s location

$500K-$1MM: Buyers in this sector were:
• First-time buyers (45%), serial entrepreneurs (30%), or existing companies (24%)
• Motivated to buy a job (40%), gain a horizontal add-on (29%)
• Located within 20 miles (59%) or within 50 miles (20%) of the seller’s location
$1MM-$2MM: Buyers in this sector were:
• Serial entrepreneurs (33%), strategic buyers (31%), first-time buyers (29%),
• Motivated to buy a job (33%), gain a horizonal add-on (25%), better ROI than other investment (23%)
• Located within 20 miles (50%) or more than 100 miles (23%) of the seller’s location

$2MM-$5MM: Buyers in this sector were:
• Strategic buyers (33%), serial entrepreneurs (30%), or first-time buyers (23%)
• Motivated to gain a horizontal add-on (40%), better ROI than other investment (21%), buy a job (19%)
• Located more than 100 miles (49%) or within 20 miles (30%) of the seller’s location
$5MM-$50MM: Buyers in this sector were:
• Strategic buyer (39%), PE firms seeking add-on (22%), or PE firms seeking platform (17%)
• Motivated to acquire a horizontal add-on (52%), vertical add-on (26%)
• Located more than 100 miles (70%) or within 20 miles (22%) of the seller’s location

$5MM-$50MM: Buyers in this sector were:
• Strategic buyer (39%), PE firms seeking add-on (22%), or PE firms seeking platform (17%)
• Motivated to acquire a horizontal add-on (52%), vertical add-on (26%)
• Located more than 100 miles (70%) or within 20 miles (22%) of the seller’s location

In Summary

Despite questions in the national and world economies, the market for small to medium size businesses remains healthy and active. It is in the much larger transactions that the issues in the macro economy are being felt.

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 valuation multiples for small businesses | Leave a comment

Confusing Interest Rates Explained

Posted on June 14, 2023 by William Bruce

Interest rates are all over the economic news. 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.

Federal Funds Rate

The Federal Funds Rate 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 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 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, which is the phase of the economic cycle we’re currently experiencing.

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, and your return on Certificate of Deposits are all directly related to the Federal Funds Rate.

As this is being written in June of 2023, the Federal Funds rate is 5.25 percent.

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.

Most banks try to maintain at least a three percentage point spread above the Federal Funds Rate. So currently, you could expect to pay 8.25 percent interest, or most likely something a bit north of that.

Prime Rate

The prime rate is the interest rate that commercial banks charge their most creditworthy customers, typically wealthy individuals, large corporations or governments. Today, the prime rate is hovering around 8 percent.

In Conclusion

The Federal Reserve System has learned quite a lot in recent dacades 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 more timely and 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. 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 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 are you just wondering what a manufacturing business is really worth? In this article, we’ll discuss how to value 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 valuations 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.

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 Manufacturing business broker, Selling a manufacturing business, valuation of manufacturing businesses | 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 William Bruce Business Broker | 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:

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!
Your accountant. He/she will need to advise you on the tax consequences of selling your business.
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 Why some small businesses don't sell | 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

financial versus strategic business buyer

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 Difference in financial and strategic buyer, financial business buyer defined, financial vs strategic business buyer, strategic business buyer defined | 1 Comment

It’s Vacation Time. Here Are 3 Ways to Protect Your Data While Taking a Break.

Posted on May 16, 2022 by William Bruce

SmallBiz-Resources.com has an excellent article out by Bill Aimone on how to manage your data security while on vacation.

The three issues discussed in the article are:

Technology Setup

If you take a laptop on vacation, make sure it’s protected by upgrading to the latest release of your operating system and is password protected. Also, use a backup product like DropBox which minimizes the amount of information that could be mined by thieves. Furthermore, it allows you to wipe the correlating data if the laptop is stolen.

The Connection, Virtual Private Network (VPN)

The author points out that connecting to the internet via unknown networks while on vacation is risky. An easy way to access a secure connection is via a Virtual Private Network (VPN). VPNs create a secure connection between the laptop and a server in the cloud. It is almost impossible to hack this type of connection.

It’s also easy to set up a hotspot connection from your iPhone which is more secure than connecting through your hotel or the airport’s unsecured networks.

Support for Small Business Owners and Employees to Stay Connected During Vacation

Technology issues happen, and when they strike it can easily turn into a desperate situation without the right IT support.

Most small businesses cannot afford to hire internal resources to provide 24/7 support to vacationing employees, especially factoring in potential time zone differences.

Small businesses can consider finding remote-access, 24/7 on-demand IT support from companies like EVAN®, which can help traveling employees when in a pinch.

In summary, these three tips from SmallBiz-Resources will help you stay compliant with the old Boy Scout motto of “Be prepared.”

To read the full article from SmallBiz-Resources, please click here: https://smallbiz-resources.com/optimize-work-cation/.

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 | Leave a comment

Seven Reasons to Retain A Business Broker When Selling Your Business

Posted on March 7, 2022 by William Bruce

William Bruce Accredited Business Intermediary, Senior Valuation Analyst

You’ve probably spent years building your business. And so, when it comes time to exit, how can you increase the chances of a successful transition?

Retaining an experienced business broker is a good place to start.

Our friends at Hatchit.us have written an excellent article discussing seven reasons why a business seller should consider bringing an experienced business broker on board for the project. The seven points discussed are:

1. Accurate business valuation and financials

2. Effective marketing

3. The right buyers at the table

4. Effective negotiation

5. An outsourced, efficient process

6. Confidential dialog

7. Documentation

To read the article by Hatchit.us discussing these reasons in detail, please visit https://www.hatchit.us/7-reasons-to-hire-a-business-broker/.

Other articles that might be of interest:

Our practice since 1986 has included business valuation, mergers, sales, and acquisitions. If we can assist in your project, please don’t hesitate to call or email with the contact information below. Confidentiality is assured.

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 | 2 Comments

Small Business Valuation Multiples Explained

Posted on February 20, 2022 by William Bruce

Small business valuation multiples explained.

In the complex area of small business valuations, are you confused about which earnings valuation multiple to use? There are at least six earnings computations, including:

SDE – Seller’s Discretionary Earnings
EBIT – Earnings Before Interest and Taxes
EBITDA – Earnings Before Interest, Taxes, Depreciation, and Amortiztion
Adjusted EBITDA – Normalized for other expenses
DCF – Discounted Cash Flow
Net Profit – What you show Uncle Sam on your tax return.

A widely used valuation methodology for privately-held businesses is applying an industry specific valuation multiple to a company’s earnings. But which earnings number should you use? For a particular business, the use of the wrong earnings metric could result in a wildly inaccurate valuation.

In addition to selecting the right earnings computation, there is also often some difficulty in choosing the proper valuation multiple to apply to earnings for a particular type and size of business.

The two most commonly used multiples for the majority of small to medium size privately-held businesses are Sellers Discretionary Earnings (SDE) for the smaller businesses, and Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA) for the larger businesses where Private Equity Groups are among the buyers.

In an excellent article, my fellow business intermediary, Barbara Taylor, co-founder of Alan Taylor & Company, clears up the confusion.

You can read Barbara’s article here: Small Business Valuation Multiples Explained.

Our firm performs written, fully documented valuations of small to medium size businesses. If we can assist with any of your business valuation or ownership transfer issues, please don’t hesitate to contact me at Will@WilliamBruce.org or by phone at the numbers listed below.

For further reading, here are additional related articles:

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 Business valuation multiples, EBIT, EBITDA, SDE Seller's Discretionary Earnings, Small business valuation, When to use SDE or EBITDA, William Bruce Business Sales & Acquisitions | 1 Comment

Who Will Buy Your Family Business?

Posted on September 20, 2021 by William Bruce

Who will be potential buyers for your family business?

As a business broker and valuation specialist, I’m often asked about the issues involved in selling a family business.

Ideally, family business owners should start planning for ownership transition well before the event. One of the first steps in planning an exit is to understand who the potential buyers might be and the different characteristics of these buyers.

Here, we will briefly discuss both internal and external sales of the family business.

Internal Sale

In an internal sale of a family business, the buyers are likely to be family members of the next generation or possibly family members in combination with key non-family employees.

Various financing options may be employed by the buyers of the business including seller financing after an acceptable down payment. Many times the older generation in a family business will finance the sale of the business to a promising member(s) of the younger generation. When this option is employed, a 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 and security agreement.

Bank loans guaranteed by the Small Business Administration (SBA) may also be available for around 75 to 85 percent of the appraised value of the business. If the business is of sufficient size, an Employee Stock Option Purchase (ESOP) plan might be an attractive option with tax advantages.

External Sale

External buyers of family businesses may come from several distinctively different categories. But most will fit into one of the following three descriptions

Job Buyers

These buyers will be individuals who are essentially buying a job for themselves. This buyer will usually be looking for a small to medium-size business. Buyers will have the financial ability to make a down payment of 15 to 30 percent of the acquisition cost of the business and will have a sufficient credit rating to obtain financing for the balance.

The financing will most likely be an SBA 7(a) guaranteed business acquisition loan amortized over 10 years, or 15 years if real estate is part of the purchase price of the business. The key for this buyer is that (1) the business must be able to pay the new owner a decent salary and, (2) then make the monthly payments on the business acquisition loan. This allows the buyer to make living from the business while he/she builds equity in the entity.

If your business has enough cash flow for both of these obligations, then you have a good chance of selling your family business to a buyer from this category.

Financial Buyers

Financial buyers are generally looking for somewhat larger businesses than the above-described buyer. Buyers who fall into this category will include private equity groups and other sophisticated investors. Most of the time, these buyers will not be owner-operators of the business, but rather will retain the current management of the business or send in a management team.

The buyer is investing for the projected financial returns. They will usually have a plan for significantly growing the business which may include such things as additional capital investment, specific management talent, adding products and services, and expanding the market geography of the business.

The plan will usually include an exit strategy after the growth and improvements have been realized. This time frame is typically three to seven years.

These buyers may employ various sophisticated financing options for the initial purchase of the business.

Strategic Buyers

Strategic buyers usually are firms that are already operating in the industry of the potential acquisition. They may be looking to increase their geographic footprint into new areas, and they may also be looking for the economies of scale usually found in such opportunities.

A strategic buyer can be either a horizontal or vertical player in the industry looking to realize specific synergies that the acquisition will create.

Financing for these buyers is varied and sometimes includes an earnout component in which the seller is paid over time according to specified financial benchmarks being achieved by the new owner.

In Summary

Depending on the size and type of your family business and your goals, you may have interested buyers from several of these categories. Our firm is experienced in dealing with all types of buyers.

If you think we might be of service in planning or executing the transfer of your family business, please don’t hesitate to contact us.

For our article discussing the top three issues involved in the sale or purchase of a business, please click here. And to review our article on how to quickly estimate the value of a business by using rules-of-thumb, please follow this link.

# # #