Business-for-Sale Marketplace Appears Strong in 2016

signThe market for privately held business entities is usually divided into two segments: Main Street businesses and the Middle Market.  Main Street generally refers to businesses with gross annual revenue of less than $5 million.  Above this, businesses are considered to be in the Middle Market space.

Main Street Activity

BizBuySell.com, the Internet’s largest business-for-sale marketplace, reported recently that the number of annual small business transactions stabilized in 2015, ending the year down just 3.6 percent from 2014’s record high.

A total of 7,222 closed transactions were reported in 2015, nearly matching the 7,494 transactions in 2014, which was the highest total reported since BizBuySell started tracking data in 2007.  The significant drop in number of restaurants sold in 2015 accounted for the slight drop in total transactions.  Sales of all other business categories except restaurants were up over the previous year.

The median revenue of sold businesses in 2015 grew to $449,462, up from $417,562 in 2014 while the median cash flow grew to $102,000 from $100,000 in 2014. Improved financials allowed sellers to both ask for and receive a higher price for their businesses in 2015. The median sale price increased a solid 7.6 percent year-over-year, from $185,000 to $199,000.

“Overall, the business-for-sale market remains strong. Business financial indicators are strengthening and owners are receiving stronger valuations, leveling out what has been a strong buyer’s market in recent years,” said Bob House, Group GM of BizBuySell.com.

The following graph shows business valuation averages of small businesses sold over the last 5 years expressed both as a percentage of annual revenue and also as a multiple of cash flow.  For a definition of cash flow, which is also referred to as discretionary earnings, please click here.

2015Q4_Small_Business_Sale_Price_Multiples

 

However, the graph below demonstrates how the valuation multiple of cash flow increases significantly with increasing cash flow.

PriceAsMultipleOfCashFlow

 

 

 

 

 

 

 

“Small business indicators continue to point toward a healthy market for buying and selling,” House said. “While both sellers and buyers should keep their eye on the upcoming election and possible regulatory changes, it’s unlikely either event would unhinge what has been an increasingly active business-for-sale environment. As small business financials improve and the market finds its balance, transaction activity should continue to be strong in 2016.”

For a table of businesses by specific type that were sold on BizBuySell in 2015 and the average valuations of each type, please click here.

Middle Market Activity

The lower Middle Market overlaps the high end of Main Street but is generally regarded to consist of businesses with gross annual revenue of $5 million or above.

Although there are individual investors in the Middle Market, the dominant players in the space are Private Equity (PE) firms.  A Private Equity firm is an investment group that makes investments in privately held operating companies through various strategies including leveraged buyout, venture capital, and growth capital. Each firm will raise funds that will be invested in accordance with their specific criteria.

There were a record number of Private Equity firms organized in 2015. Globally, Private Equity groups are sitting on a record $1.3 trillion of cash and actively seeking attractive investment opportunities. Fundraising continues strong with PE groups raising $271 billion in 2015.  This situation almost guarantees that 2016 will be a very good year for sellers of middle market businesses.

Interestingly, some economists have said the downturn in the public markets (ie: stocks listed on the New York Stock Exchange and other markets) will actually fuel the flight of investors from the publicly listed securities into the Private Equity firms.

Several specialists in the Middle Market predicted that the technology, healthcare, manufacturing and telecom sectors would be particularly strong in 2016.  Conversely, they listed oil and gas, retail, and food and beverage as weak categories.

In summary

Across the board from mom and pop businesses through Main Street into the Middle Market, it appears that 2016 will be a good year for individuals who are planning to exit their business.

In a January survey of the membership of the American Business Brokers Association, which is composed of both Main Street and Middle Market intermediaries, 76 percent of the respondents said they expected 2016 to be more active than 2015.  Only one percent expected this year’s activity to be lower than last year.

#     #     #

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 nationwide to business owners and buyers.  He currently serves as president of the American Business Brokers Association.
Posted in Business Valuation & Appraisal, Buying or Selling a Business | Tagged , , | Leave a comment

The 3 Financial Benchmarks All Business Owners Should Monitor.

Updated February 14, 2017.

Financial ratios

Many small to medium size business owners, including this author, get wrapped up in day to day management of their businesses to the exclusion of some important aspects of oversight.

The ultimate business benchmark is, or course, bottom line net profit.  However, the three financial ratios discussed here don’t take long to calculate and will keep you on track for a healthy bottom line number.  These are the three that should be checked frequently to monitor the ongoing health and viability of your business:

Gross Profit Margin

Gross profit is simply your total sales (less sales tax) minus the cost of products sold.  Other expenses like rent, payroll, etc. are not considered in this calculation.  The gross profit margin is usually expressed as a percentage by dividing the gross profit by total sales.

For example, if your gross sales for last year (exclusive of sales tax) were $500,000 and the cost of the products you sold was $220,000, then your gross profit was $280,000.  Dividing your gross profit by total sales, we can calculate that your gross profit margin was 56 percent.  The rest of your expenses come out of this gross profit to compute your net profit.

Most industries have benchmarks for gross profit margin.  If yours is above your peer group, you’re doing a good job.  If lower, look for ways to improve.

Current Asset Ratio

This ratio is a measure of your company’s ability to pay its bills as they become due.  It is calculated by dividing your company’s current assets by its current liabilities.

Current assets are cash in the bank, accounts receivables and any other assets you expect to be converted into cash within the next 12 months.  Current liabilities are those obligations that will become due and payable during the next 12 months.

A ratio of two or better is considered by most analysts to be a comfortable situation.  If it’s one or lower, you’ll be waking up in the middle of the night!

Inventory Turn

This calculation measures how fast you’re selling and replacing your inventory.  Inventory turn is particularly important in retail and wholesale operations, but has application in all business categories.  It’s calculated by dividing the average inventory for the time frame being analyzed by the cost of goods sold.

Again, consult your industry benchmark for what is average in your niche.  The higher the turn, the better job you’re doing in managing your inventory level.  A low number most likely means you’re carrying too much inventory for your level of sales.

In summary, don’t be intimidated by the idea of periodically calculating these benchmarks.  It’s pretty easy.  And if you need help, ask your accountant.

Here are related articles you might find interesting.

#     #     #

William Bruce is a business broker, an Accredited Business Intermediary and a business appraiser.  His practice includes consultations nationally on matters involving business valuations and transfers.  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 , , , , , | Leave a comment

Banks Ranked Strongest to Weakest in Mobile and Baldwin Counties, Alabama

 

This article has been updated and can now be found at https://williambruce.org/2016/08/15/banks-rated-strongest-to-weakest-in-mobile-and-baldwin-counties-alabama/.

#     #     #

William Bruce has served as a bank director.  He is a business broker, an Accredited Business Intermediary and business appraiser.  He consults nationally on issues involved in business transfers and valuation.  He may be reached at Will@WilliamBruce.org  or (251) 990-5934.  He currently serves as president of the American Business Brokers Association.

 

Posted in Alabama's Economy, Gulf Coast Regional & National Economy, Mobile, Fairhope & Gulf Shores, Alabama | Tagged , , , , , , , , , , , , , , , , , , , , , , , , , , , , | Leave a comment

The Best and Worst Franchises to Buy

Brightway Insrance is Forbes Magazine top pick for franchises costing less than $150,000.

Brightway Insrance is Forbes Magazine top pick for franchises costing less than $150,000.

As a business broker and appraiser, I’m often asked about franchises, which is why I noticed the following article.

Forbes Magazine writer Emily Inverso has just penned an interesting list of the best and worst franchises to buy.  Her rankings are based on data gathered over a five year time frame from 2009 through 2013.  Inverso’s article can be reviewed here.

The franchise offerings are ranked on several metrics including entry cost, 5-year growth rate and 5-year franchise continuity.  Franchise continuity as shown in the rankings is the percentage of franchises opened that are still in business at the end of the five year period.

The franchises are divided into three categories according to entry cost: up to $150,000, $150,000 to $500,000 and over $500,000.

The top ten in Forbes’ ranking for the under $150,000 entry cost were:

  • Brightway Insurance – sells personal and business insurance policies.
  • Maid Pro – provides residential cleaning service.
  • Right at Home – home care to seniors and disabled.
  • Discovery Map – curates quirky maps and travel guides.
  • Just Between Friends – provides consignment events for children’s and maternity clothes.
  • Seniors Helping Seniors – non-medical home care by seniors
  • BrightStar Care – homecare
  • Pop-A-Lock – locksmith services
  • Mathnasium – math tutoring
  • Weed Man – lawn care

As ranked by Forbes, the worst 10 franchises in the under $150,000 investment category were:

  • American Express Travel Services – 57% continuity for 5-year period
  • Gardsman Furniture Professionals – 47 % continuity
  • ERA Real Estate – 48% continuity
  • All Tune and Lube – 31% continuity
  • United Country – 52% continuity
  • WSI – 43% continuity
  • Handyman Connection – 31% continuity
  • Curves – 37% continuity
  • Computer Trouble Shooters – 42% continuity
  • Realty World – 29% continuity

In the mid sized investment range of $150,000 to $500,000, these were Forbes’ top 10 ranking franchises:

  • Jimmy Johns – fast food
  • Jet’s Pizza – deep dish pizza in a square pan
  • Marco’s Pizza – “authentic Italian” pizza
  • Plato’s Closet – young adult clothing
  • Dutch Bros. – drive-thru coffee shops
  • Wingstop – wings restaurants
  • Sports Clips – sports themed barber shops
  • Batteries Plus Bulbs – replacement batteries
  • Anytime Fitness – 24 hour gyms
  • Auntie Ann’s – pretzels in mall food courts

In the same size category ($150,000 to $500,00) these were Forbes worst 10 franchises to buy:

  • It’s a Grind Coffeehouse – 36 locations
  • Econo Lube N’ Brakes – 33 locations
  • Mr. Payroll – 88 locations
  • Cottman Transmissions – 67 locations
  • Chock Full o’ Nuts – 31 locations
  • Quiznos – 1,439 locations
  • Great Steak & Potato Company – 90 locations
  • Epcon Communities – 86 locations
  • Fitness Together – 207 locations
  • The Athlete’s Foot – 54 locations

For details on the above franchises and to review the ranking of franchises requiring an investment of greater than $500,000, please visit the Forbes article here.

For additional article by William Bruce on franchise risks and opportunities, please see:

Best & Worst Franchises Listed by SBA Loan Default Rates

List of Franchises Not Qualified for SBA Loans

What is a Franchise Really Worth. How to Value any Franchise.

#     #     #

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 may be reached at (251) 990-5934 or by email at WilliamBruceOnline@gmail.com.  His business brokerage website may be viewed at www.WilliamBruce.net.
 
If you found this content interesting, share it using the links below:

 

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

Types of businesses most and least likely to be approved for SBA loan

SBA loans by type of business

SBA loans by type of business

By William Bruce

It’s well known that some types of small to medium size businesses are more likely to receive SBA loans than others.

We are indebted to George Heaslip, “The Loan Professor” for the following ranking.  George is an independent SBA loan originator of many years experience.  George is based in South Florida and can be reached at (561) 329-1315 or by email at gbh7@mac.com.

Based on his experience and opinion, George periodically issues a ranking of business categories most and least likely to receive SBA loan application approval.  It’s a star rating method with five stars being the most likely to receive loan approval.

The list is updated quarterly and is the only one of its kind in the U.S.  This ranking is as of April 2015.

*** A/C & Heating

** Advertising and Promotion

Zero Adult Merchandise

*** Agricultural Products and Plantings

** Aircraft Maintenance

**** Aircraft Flight Schools, with real estate

* Air Duct Cleaning

** Alarm Systems, Residential and Industrial

** Amusement/Theme Parks established with real estate

**** Animal Care & Grooming, with real estate

**1/2 Animal Grooming, no real estate

** Antiques Dealer

Zero Apartment Houses, Strip Malls, all investor properties

*** Appliance Sales and Repairs

** Art Gallery/Dealer

** Arts and Crafts

** Art Framing

****1/2 Assisted Living Facilities with real estate

**** Auto Body & Repair Shop with real estate

**1/2 Auto Body & Repair, leased facility

*** Auto Car Wash, with real estate

** Auto Broker

Zero Auto Car Wash, no real estate

**** Auto Car Wash with real estate

** Auto Salvage

Zero Auto Used Car Lots

* Awards/Prizes/Engraving

***1/2 Beauty/Spa One Stop Centers, with real estate

** Beauty/Spa One Stop, leased

*1/2 Bed & Breakfast, with real estate

**1/2 Bagel Restaurant, leased

*** Bagel Restaurant, with real estate

** Barber/Styling Shop, franchise

Zero Barber/Styling Shop, leased

***1/2 Bakery, Neighborhood, with real estate

** Barges, Sea Transport

* Billiard Parlor

**** Biohazard Cleanup Services, Per Event

****1/2 Biohazard Cleanup Services with government accounts

***1/2 Boat/Marine Manufacturer with real estate

*** Boat Storage Facilities with real estate

Zero Boat Tours

* Book Store

*1/2 Bookkeeping Services

*1/2 Boutique and Bridal Shops

***1/2 Bowling with bar & restaurant and real estate

** Bridal/Baby Shops

**** Building Component Suppliers and Installers

**1/2 Building Supplies

**1/2 Building Renovators

*1/2 Business Brokerage Companies

* Greeting Card/Gift Shop

** Carpet Cleaning Franchise

**** Car Wash, with real estate

Zero Car Wash, no real estate

Zero Printer Cartridge Refil

Zero Casino, Gambling

***1/2 Catering with real estate

** Catering, Business & Residential, no real estate

*** Cement Product Manufacturers with real estate

***1/2 Cemeteries

Zero Charter Schools

**** Child Care Centers with real estate

** Child Care Centers, no real estate

**** Children Party Center, franchise, with real estate

* Children Party Services

*1/2 Chiropractic Services

***1/2 Chropractic Services seeking a building, as opposed to current lease

Zero Churches

Zero Cigar Store

** Cleaning, Clothing

*** Cleaning Janitorial

*** Closet Interior Manufacturers

** Clothing Stores, Leased, Franchised

** Club Houses

***1/2 Cold Storage Facilities

** Coin Laundry

Zero Collection Agency

***** Commercial Building/Condo For Business Expansion

* Computer Supplies

** Construction/General Contractor

**** Consulting Companies with fine tax returns (Legal, Accounting,

*** Consignment Shops with real estate

*1/2 Consignment Shops, leased facility

*** Contractors, established with government accounts

* Contractors, other

Zero Convenience Store

* Costume Shop

*** Crane Services

***1/2 CPA Practice

** Damage Restoration

** Dance Studios, children and/or adults

Zero Data Management

*** Delis with real estate

** Delivery Services

***** Dentists/Dental Practices

**** Dental Lab

***** Distribution Centers with real estate

*** Distribution Centers, leased facility

***** Doctors

**** Doctors With Patented Product

** Document Shredding

****1/2 Dog and Cat Kennels with real estate

*** Dry Cleaners, franchised

** Dry Cleaners, not franchised

** Dry Cleaners with real estate

** Educational Schools

** Embroidery Services with commercial accounts

*** Electrical Contractors, with fine business records

Insurance, Immigration, other professional)

** Employment Placement Companies

***1/2 Environmental Cleanup

* Electronics/Computers

** Equipment Sales, Services, leased facility

*** Equipment Sales, Services, with real estate

**** Equipment Suppliers/Installers, established

* Event Planning

***** Export Products Manufacturers

**** Exterminating Companies, franchise

****1/2 Farm/Ranch Facilities and Equipment

***** Fabrication Companies with real estate

***** Factories/Manufacturing

*** Farm Equipment Sales/Servicing

**** Fast Food Franchises, with real estate, and on the Franchise Directory

* Fencing Companies

1⁄2 Film Production Companies, Independent

* Financial Services

** Firearms

*** Fireplace and Furniture Manufacturers

** Fish Farm

Zero Fishing Vessels

*** Fitness Health Club, expansion to new facility, not leased

**** Fitness Centers, franchised with trainer(s) and real estate

*** Flooring Contractor

***1/2 Floral Centers with real estate

** Flowers

**1/2 Food Business, Retail

***** Franchises with 100 or more locations, on the Franchise

***1/2 Franchises, like above, no real estate

** Franchises other with real estate

Zero Franchise, New

Zero Franchises not on the Franchise Directory

*** Freight, with real estate

Zero Fund Raising

***** Funeral Homes with real estate

*** Furniture, Retail with real estate

Zero Game Room

***1/2 Garden Centers, growing sales, with real estate

***1/2 Gas Stations/Truck Stops, with real estate

**1/2 Gas Station/Convenience Store, with real estate

Directory, and with real estate

Zero Gift Shop

*** Glass Company, Auto, Home, Industrial

**1/2 Golf Courses, established, historic sales growth

* Golf Store

** Gourmet Catering

***1/2 Gravel Pits and Dredge

*** Grocery Store with real estate

*1/2 Grocery Store, leased

* Group Transportation

** Guard Company, Security

* Guided Tour

* Gyms, not franchised

Zero Hair Salon

***** Hardware Stores, with real estate, established, no big

** Hazmat Cleanup Services

**1/2 Health Products, franchise and on the Directory

* Hobby Shops

**** Home Health Care Services

***1/2 Home Health Care Staffing Services

** Home/Condo Owners Association Management Companies

*** Home Heating Fuel distributor

***1/2 Hostels with growing rent rolls

**** Hotels, Flagship

**1/2 Hotels/Motels, other

**** Hydraulic Systems and Services, with real estate

* Ice Cream/Yogurt

Zero Import Companies

Zero Investment Properties, like strip malls, apartments

**** Industrial Buildings/Condos, 51% owner occupied

*** Injection Mold, with real estate

** Insurance Agencies, franchise

**** Interior Design Units Manufacturers

* Internet Related

** Irrigation

*** Janitorial Services, commercial accounts

Zero Jet Ski Rent

** Jewelry, Retail

**1/2 Kitchen and Bath Retail

***1/2 Kitchen and Bath Products Manufacturer

** Land for business expansion and construction to start immediately.

***1/2 Landscaping with commercial accounts

*1/2 Landscaping, residential

box competition

**** Law Firm, business expansion/new facility

Zero Limo Business

*** Liquor Store with real estate

** Liquor Store, no real estate

** Locksmith

*** Lounge/Liquor, growing business with real estate

**** Machine shop, historical growth, with real estate

** Mail Packaging/Mail Order Services

***** Manufacturing Facilities with real estate

***** Manufacturing Facilities that export

*** Marinas with real estate

***1/2 Marinas/Restaurant, with real estate

** Marine Related Sales

* Marketing Company

*1/2 Massage, body, back and feet

***** Medical Related, except chiropractic

Zero Medical Billing Software and Services

***** Medical Product Distributers, with warehouse real

***1/2 Medical Product Distributers, leased facility

***1/2 Metal Fabricator, with real estate, good track record

Zero Micro Breweries

***1/2 Millwrights, with real estate

**1/2 Mines

*1/2 Miniature Golf

Zero Mobile Homes

**** Motel for conversion to an ALF, re-hab center, or nursing complex

***** Motel, Flagship, with real estate, otherwise ***

** Moving Companies

* Movie Theaters

** Mulch Products

** Museums, for profit

** Music

***** New Building or Upgrade/Expansion

Zero Not For Profit Organizations

Zero Nail Salons

**1/2 Nursery/Plants

****1/2 Nursing Home, with real estate

*** Nursing Home, no real estate

** Nutritional Stores, if on the registry and a franchise

Zero Office Building, not 51% business owner occupied

estate

***** Office Building/Office Condo, 51% business occupied

* Oil Wells

** Painters

Zero Parasailing

*** Parking Lot Cleaning and Maintenance

* Party Goods

**** Pawn Shop with real estate, otherwise **

*1/2 Personal Services

Zero Personnel Staffing, non-medical

**** Personnel Staffing – medical

**** Pest Control, established and franchised, otherwise *1/2

**** Pet Centers, with real estate, franchise, fine reviews

**** Pharmacies, no compounding

***** Pharmacies, compounding

** Photography services

* Pizza Shop

Zero Pressure Cleaning

Zero Phone Sales

** Pool Supplies, leased site

***1/2 Pool Supplies, establishes, with real estate

**** Pre-School with real estate, otherwise **

* Printer Cartridge Refil

* Printing and Typesetting

**** Professional Service Companies (Accounting, Legal, etc.) seeking a

***1/2 Plumbing Supply

***1/2 Pool and Supplies, no real estate

***** ` Pool and Supplies, with real estate, franchise

Zero Pool Cleaning/Maintenance

** Publishing

* Residential Realtors

****1/2 Pet Kennels and Supplies

***1/2 Recreational Facilities and Clubs, with real estate, fine records

**** Recycling Facilities

*** Restoration Services, franchise

***** Recycling Facilities with real estate

* Rental Businesses

** Repair Services, Licensed

****1/2 Restaurants, solid historical records, with real estate

*** Restaurants, franchised

** Restaurants, other

*** Retail, with real estate, solid historical records

larger facility

** Retail, no real estate

*** Roofing Contractor

**** Roofing Maintenance

* Roof Cleaners, independent, pressure washing

* Routes

* Sanitary Landfills

Zero Satellite Dishes (TV)

** Security Systems

***** Self-Storage Facilities

Zero Seven-Eleven Franchises

**** Sign Companies with real estate

*** Sign Companies without real estate

** Sight Preparation, for construction

Zero Skin & Massage

* Security Related

** Shoes/Repairs

*** Skating Rinks with real estate, food services

** Sod Distribution

*** Software Services, with three years of documented growth

***1/2 Sports Arenas

* Startups, unless customers are lined up

*** Sports Bar, established, clean records

***1/2 Sports Bar, established, clean records, with real estate

****1/2 Sports Sales Related, long business history, with real estate

*** Sports Sales Related, franchise and on the Franchise Directory

* Start Up Businesses, difficult, requires solid business plan high cash

Zero Strip Malls (considered as investment property)

** Sub (Sandwich) shops, franchise

*** Supermarkets, flag

* Surf and Active Wear

* Tailoring

Zero Tanning Salons

Zero Taxi Business

* Tax Preparation

* Teeth Whitening, non-dentist

Zero Telemarketing

* Telephone Sales

*** Tennis Clubs with real estate

***** Therapy Centers and Therapy In-Home Services

* Tobacco Related

*** Towing Services, Autos

**** Towing/Repair Services/Trucks

injection and collateral backup

*** Trade Contractors

**** Training Schools, for profit, established, with real estate

** Training Schools, other

** Transportation Services

Zero Travel Agencies

**1/2 Tree Farm, with real estate

**** Truck Repairs and towing

**** Truck and Car Washes, with real estate

***** Truck Stop, Full Service/Repair, with fuel, food, on site

* Tutoring

Zero Vacant Commercial Land

*** Vacant Commercial Land for business relocation/construction within a

Zero Valet Parking

** Variety Store, non-franchise

***1/2 Variety Store, franchise, with real estate

Zero Vending Machine Routes

***** Veterinarian

Zero Video Related

**** Uniforms Manufacturing, United States, with real estate

Zero Used Car Dealerships

***** Warehouses, for an expanding business that will occupy

** Water/Smoke Damage Restoration

** Water Purification

* Web Development and Hosting

* Wedding Planning/Gowns

** Well Drilling

*1/2 Wineries

***1/2 Wholesale Distributors, with real estate

** Wholesale Distributors, no real estate

** Yogurt Store

#     #     #

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 may be reached at (251) 990-5934 or by email at WilliamBruceOnline@gmail.com.  His business brokerage website may be viewed at www.WilliamBruce.net.

 

 

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

Selling a Business: The Issue of Buyer Acquisition Financing

Business acquisition loanPrevious articles have discussed the importance of having a good reason for selling your business, getting the business ready for salesetting the right asking price, and taking your business to market.  In this article we will talk about the question of acquisition financing for your business buyer.

Whether you want to our not, you’re going to get involved to one degree or another in the financial arrangements of your buyer.

Acquisition financing is always an issue in selling a business.  Almost all business buyers will need some amount of financing to complete the transaction.  Of all the business sales that I’ve seen, over 90% involved financing of some description.

Very few business buyers are sitting on enough cash to buy a business without financing.  People with that much money are usually “clipping coupons” and not interested in jumping into the challenges of daily business management.

So where do business buyers get the necessary financing?  There are three sources, aside from family member of the buyer who sometimes enter the situation.  Let’s discuss each:

Banks

Although most people seeking a loan to buy a business will think first of banks, I can tell you from years of business brokerage experience that banks generally do not make business acquisition loans.

That statement will surprise most people.  Once you’re in business, banks will compete for your patronage, but most will not stick their necks out in the beginning to make you a business acquisition loan.  Bank advertising would lead you to believe they would do so, but in more than 90% of the cases, they will find some reason to decline the business acquisition loan application.

The exception might be if you have a strong, years-long relationship with a bank and you can offer some other collateral such as Certificates of Deposits.  Or if the bank participates in the SBA loan program, they might be able to approve a SBA guaranteed loan (see below).

So don’t be surprised if a bank turns down your buyer.  And don’t take it as a reflection on your business or the buyer.  It’s just the way things are.

Now this is the humorous part of the situation.  It’s ironic but it has happened more than just a few times.  After your business buyer been in business for a number of months or a year or so, the same bank that turned him down for a loan to buy the business may come calling on him soliciting his banking business.  One of my buyers in this situation responded to the banker by assuming a serious air and in a somber tone, said, “Well now Mr. Banker, we’ll be happy to consider your application for our business.  Let’s see, we’ll need your financial statement and a list of references and your business plan for five years into the future.  Once we have your completed application, I’ll be glad to take it before my committee and let you know of our decision.”

The banker was taken aback.

SBA

The Small Business Administration (SBA), an agency of the federal government, provides for business acquisition loans through its approved lenders.  The SBA generally does not make direct loans, but rather the agency partially guarantees the loan that is made by the approved lender.   It’s known as the SBA 7(a) program.

The SBA list of approved lenders includes many banks with the largest lender currently being Wells Fargo.  But some community banks also make a significant volume of SBA guaranteed loans.  Some of these lenders will include in the loan total an amount for working capital in addition to the price of the business, after down payment.  Down payment requirements range from 20% to 35% plus there are usually up-front fees paid by the buyer for various requirements.  Interest rates are competitive with the marketplace.

Your business must be growing and profitable to be approved by the SBA.  A downward trend in gross revenue or profits will usually disqualify a business.  And another disqualifier of the SBA, is the requirement that the business buyer have experience in your industry.  This requirement pretty severely limits the pool of prospective buyers for your business who can use SBA financing.

The SBA route for a business acquisition loan is sometimes frustrating because of the time, detail and documentation that are involved.  If your buyer goes this route, be patient.  And stay on top of the SBA requests for information.  The quicker you can get the information and documentation to the SBA underwriter, the quicker your loan will close.

The Seller

In the majority of the business transfers that I handle, the owner of the business finances a portion of the purchase price for the buyer.  Some sellers are initially reluctant to offer financing.  However, with a strong down payment from a buyer who has a good credit bureau report and personal financial statement, the advantages to a business seller can be significant.

Not only is the tax bite usually lower for a seller who finances, but national surveys consistently show that businesses with seller financing (1) sell for more money and (2) sell in a shorter time frame.

In one recent survey of 3,965 business sales as reported by Toby Tatum in Transaction Patterns, the median selling price of businesses with seller financing was 15 percent higher that those without it.  The average down payment on seller-financed businesses was 37 percent.

And of course, there is the obvious benefit to the seller of additional income from the interest charged on the note.  The going rate as this is being written is around 5 to 6 percent.  This is significantly more than you could earn if you invested the money in a Certificate of Deposit.

And keep in mind, we’re not talking about you financing just anybody.  We’re talking about a buyer whom you have approved after checking his credit report and references, and who has made a down payment of usually between 25% and 50% of the selling price of the business.  Plus, you have a mortgage on the business and all it’s assets for the term of the note and the personal guarantee of the buyer.

Most owner financing – though not all — is in the form of a balloon note.  The balloon note solves two opposing desires.  The buyer of the business wants to keep his payments low; however, the seller usually wants his money as soon as possible.  By amortizing the note – calculating the payments – on, say, a 12-year payback schedule, the payments are kept low.  But the inclusion of a 5-year balloon requires that the remaining balance be paid off at the end of five years.

After the new owner has been in business for five years and has built a track record for himself at the bank, he should have no trouble going to his bank and refinancing the balloon.  In the low interest rate environment of recent years, I’ve seen new owners refinancing the balloon even before it came due to save money.  The balloon note has been a win-win vehicle for both buyers and sellers.

To recap, if you are willing to consider financing the sale of your business to a credit worthy buyer after an appropriate down payment, the advantages you can usually expect are:

  •  A lower tax on the proceeds of the sale.
  • A higher selling price.
  • A shorter timeframe to close the transaction.
  • Additional income from the interest on the note.

In conclusion, please keep in mind that selling a business is not an overnight process.  In my experience of over two decades as a business broker, about six to eight months is average.

He’re another article that might be of interest: Top 3 Issues Involved When Buying or Selling a Business.

#     #     #

William Bruce currently serves as president of the American Business Brokers Association.  He is a business broker, an Accredited Business Intermediary (ABI) and a business appraiser assisting buyers and sellers of privately held businesses in the transfer of ownership.  His practice includes consulting services nationally for business buyers and sellers.  He may be reached at (251) 990-5934 or WilliamBruceOnline@gmail.com.

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

Selling a Business: Taking Your Business to Market

How to Sell a Business

How to Sell a Business

Please keep in mind that selling your business is not an overnight project.  It takes time.  My experience has been that six to eight months is about average.

Previous articles have discussed the importance of having a good reason for selling your business, getting the business ready for sale and how to set the right asking price for your business.

You are now ready to take your business to the marketplace.  So let’s first discuss a couple of documents you’ll need to have handy.

Confidentiality

As you are already aware, confidentiality is important in the sale of a business.  If word gets out that the business is for sale, bad things can start to happen.  Employees start looking for other jobs, fearing that the new owner may not retain them.  Customers may wonder about the business and start shopping elsewhere.  Suppliers can get nervous.

So first, you’ll need a confidentiality agreement already drawn up and ready for signatures.  This is a must.  Anyone who replies to a generic ad for your business must sign a confidentiality agreement before being furnished any identifying details of the business.  This enforceable contract is also referred to as a non-disclosure agreement.

If you’re using a business broker in your sales effort, he already has a strong non-disclosure agreement drawn up and rigorously enforces the requirement for getting it signed before disclosure of any specific information.

And if you don’t mind me slipping in a commercial here for business brokers – remember, that’s the way I make my living – it is much easier to maintain confidentiality by using a professional business intermediary than by trying to advertise and sell the business yourself.  And national statistics show that business brokers will sell a business quicker and with fewer problems than owners trying to do the job themselves.  I’ve found that most business owners are very good at running their businesses, but few have sold a business before.  It’s a process that is fraught with landmines.

But hey, you already know I’m prejudiced!

The confidentiality agreement should require the name and home address of the person making the inquiry plus contact information including phone numbers and email address.  In my business brokerage practice, I also require that the prospect give me some information on his finances and business experience.  I’ve never had a legitimate prospect who was sincerely interested balk at signing the agreement.  If a person balks, it’s almost always an indication that he or she is a gossipy “tire kicker” who’s looking just out of curiosity.

The Marketing Package

The next document you’ll need to have ready is a multi-page marketing package on the business.  This summary should include a brief history of the business, a description of your current operation and a recap of the financial numbers.  This marketing package is sometimes referred to as the Executive Summary or the Confidential Business Review, which is the term I use most often.  Business brokers have a finely tuned template that is used for this important document.

This Confidential Business Review serves as an accurate and informative synopsis of your total business operation.  This document is very important in the process of selling your business. It is your primary marketing vehicle.  Once a prospective buyer expresses a sincere interest in the business, has signed a confidentiality agreement and passed a preliminary screening, he is then given a copy of this document.

The Confidential Business Review serves two purposes.  First, it allows the prospect to make an informed judgment as to whether he is interested in pursuing the business after reviewing the information contained in the document.  And secondly, the Confidential Business Review provides an outline that the prospect will use in a more thorough investigation of the business during the due diligence phase of the sales process.

The prospect will quite naturally be checking the numbers and information provided in the Confidential Business Review.  For this reason (and other good reasons), it is extremely important that no erroneous information be included in the document.  Even an honest mistake can arouse suspicion and kill the transaction.

While it’s important to paint as favorable a picture of your business in the Confidential Business Review as the facts will allow, it is imperative that you don’t step over the line and make any false representations.  Any erroneous information in the document will definitely come back to bite you!

Advertising

Now that we have the confidentiality agreement and the Confidential Business Review ready, we can start the advertising phase of marketing your business.

A few years ago, my office obtained most of our buyer prospects from our classified advertisement in the Sunday newspaper.  However, technology has changed the world, and we now receive the majority of our inquiries from the various websites we use on the Internet.  These  websites are particularly important for obtaining out of area prospects, but even local folks here in town are looking at the websites and will call to inquire about a business that interests them.

My office pays several thousand dollars a year in subscriptions to post our listings to 24 different business-for-sale websites.  The Internet is where the action is today.  No question about it.

What’s Next

To recap, you have spruced up your business premises, brought the books and records up to date, computed your yearly cash flow, put a reasonable asking price on the business, made arrangements for maintaining confidentiality, drawn up a business marketing package  and placed the business on the market with appropriate – but non identifying – advertising.  What happens next?

Let’s optimistically assume that a genuinely interested prospect has seen one of the ads for your business and called or emailed  to inquire.  If you’re using a business broker, the broker (1) has explained the need for signing the confidentiality agreement and obtained the necessary information and signatures on the agreement, (2) has questioned the prospect on his purchase criteria and (3) obtained some preliminary information on the prospect’s financial situation, business experience and his capacity to buy your business, and (4) briefed the buyer on the process – the steps involved – in buying a business.  Most prospects will be first time business buyers and really don’t have a clear idea of the actual step-by-step process one goes through in buying a business, so we spend some time with them doing a little buyer education.

If all of the above indicates that your business might be a good match for the prospect’s purchase criteria and if the prospect is deemed serious and sincere with the financial capacity to make the purchase, then he is given the Confidential Business Review of your business.

Let’s again be optimistic and assume that after reviewing your Confidential Business Review, the prospect calls back a few days later and says he is genuinely interested in the possibility of buying your company and wants to proceed with a more detailed look at the business.

The next logical step is a meeting between you and the prospect.  The next article will discuss ways to make the meeting a success.

#     #     #

William Bruce is a business broker, an Accredited Business Intermediary (ABI) and a business appraiser 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 for business buyers and sellers.  He may be reached at (251) 990-5934 or WilliamBruceOnline@gmail.com.
Posted in Business Valuation & Appraisal, Buying or Selling a Business | Tagged , , , | 1 Comment