Serving clients nationally from offices in Fairhope, Alabama and Baton Rouge, Louisiana. Contact William at Will@WilliamBruce.org or by phone at 251-990-5934 (Fairhope) or 225-465-5799 (Baton Rouge). We look forward to hearing from you!
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 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. He may be reached at (251) 990-5934 or by email at Will@WilliamBruce.org.
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:
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.
These 3 key financial ratios should be calculated by every small business owner.
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, of 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 margins. 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.
Brightway Insrance is Forbes Magazine top pick for franchises costing less than $150,000.
As a business broker and appraiser, I’m often asked what are the best and worst franchise investments, 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
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:
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:
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
** 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.
Whether you want to our not, you’re going to get involved to one degree or another in the financial arrangements for business acquisition financing 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.
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.
Please keep in mind that selling a business is not an overnight project. It takes time. My experience has been that six to eight months is about average.
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 to sell a business.
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.
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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 Will@WilliamBruce.org
As the seller of a business, you’re going to be involved in one way or another in the buyer’s quest for acquisition financing.
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 and let’s briefly 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 an 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.
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 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 and some non-bank lenders. Some of these lenders will include in the loan total an amount for working capital in addition to the price of the business. Down payment requirements range from 20% to 30% 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 profitable to be approved by the SBA. And another SBA disqualifier is the requirement that the business buyer have experience in your industry or some closely related field.
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 the loan will close.
The Seller
In many 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 with 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 in the survey 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 6 ½ 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 seller 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 reasonable while the new owner assumes management responsibility. 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 creditworthy 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.
Should you have any questions about the issues discussed above, please don’t hesitate to phone or email. Contact information is below.
In the next article, we’ll talk about how to actively market your business while maintaining strict confidentiality.
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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. William may be reached at (251) 990-5934 or by email at Will@WilliamBruce.org
As an instructor for the business broker training programs of the American Business Brokers Association, I’ve had the rewarding opportunity of offering training to numerous individuals. Many of these folks have gone on to very prosperous careers in business brokerage (and become good friends in the process).
What I’ve learned is this: A business background is essential to success as a business broker. Even better is prior ownership of a small to medium size business.
Beyond this, other personal assets that are important for success are (1) a sales aptitude, (2) an ability to be diplomatic in difficult situations and (3) a stick-to-it determination to work hard and independently on your own schedule without becoming lazy. (I’ve been a business broker for over two decades, and I’ve seen laziness doom a few individuals.)
Also important is the ability to budget your personal finances. While the income potential from business brokerage is significantly into the six figures, it tends to be “lumpy.” My point: Don’t go out and buy a new Mercedes with your first commission!
So what else do you need to become a successful business broker?
Well obviously, you will need some training specific to business brokerage. Regardless of your education and business background, there are many considerations specific to the profession that you’ll want to become familiar with. Just a few of these are:
Should I buy a business brokerage franchise or go independent?
What about office space: home office or “real” office?
How do I get listings if I’m just starting my practice?
What’s percentage commission should I charge?
How do I recast financial statements for discretionary cash flow?
What are the most common business appraisal methodologies?
How do I build a marketing package for each type of business?
How do I maintain strict confidentiality while marketing nationally?
What advertising venues are appropriate for marketing a business for sale?
How do conduct the initial buyer / seller meeting?
What are the do’s and don’ts of successful negotiations on price and terms?
How do I get the transaction to the closing table (and get paid!)?
There are several business broker training alternatives available for individuals who want to enter the profession. The American Business Brokers Association conducts a two day training seminar offered four times a year at various locations around the country. For additional offerings, a quick Google of “Business Broker Training” will return many options.
Some final thoughts:
When considering your professional training options, check references of previous students.
Make sure the training program you select offers post-classroom support, preferably at no cost.
Check your state laws. Currently 17 states require business brokers to have a real estate license regardless of whether actual real property is being transferred.
Before you commit to a business brokerage franchise or licensing arrangement (both of which can be expensive), investigate your options as an independent. Some franchises are very good, but it’s easier than ever to be an independent. The decision depends on your personal needs and preferences.
Additional Information
For further reading, here are additional related websites and articles:
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.
Updated December 8, 2025 by William Bruce, President, American Business Brokers Association
Nothing causes the buyers and sellers of privately held 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 cheap 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 deal.
In our first article, we talked about the importance of being able to give a good reason for selling. In the second article, we discussed how to get a business ready to sell.
In this article, we explore the critical issue of pricing.
The most common mistake that I’ve seen in my years as a business broker, is that business owners tend to overprice their business. It’s quite natural to do so, particularly if you’ve started the business from scratch and grown it into a successful company. You quite understandably have an emotional investment in the business in addition to a financial interest.
It’s the same phenomenon that some of us have experienced when we sell our home. I thought my first home, with all the improvements my wife and I had made, was worth much more that it actually was. I soon learned that the market, not the owner, dictates price.
The disadvantages of overpricing a business are serious. As we discussed, the first question most business buyers ask is “Why is the business for sale?” Frequently the second question is “How long has the business been for sale?” If the business has been on the market for a long time and hasn’t sold, it raises real doubt in the buyer’s mind, which is hard to overcome.
Another problem with an overpriced business is that if you’re using a business brokerage firm, the agents in the office will immediately recognize that the business is overpriced and give it very little exposure. Most business brokers work strictly on commission. They don’t get paid until the business is sold, and they will not waste time on a business that will not sell because it is overpriced.
And today’s business buyers are pretty savvy. All of the appraisal guidelines and rules-of-thumb on valuing businesses are available on the Internet to anyone who will take a little time to find them. So most buyers will have a fairly accurate idea of what a particular business is worth. If a business is grossly overpriced, the buyer prospect will not even look – and you’ve lost some of your best prospects who will go on to buy another business for its fair market value.
So, if you don’t retain anything else from this article, let it be this from the voice of experience and the school of hard knocks: Nothing is harder to sell than a business that is overpriced.
The appraisal of privately held businesses is not an exact science but there are guidelines and rules-of-thumb that can be used for a quick approximation of value. And formal business appraisals are now readily available.
Certain situations require a formal business appraisal such as the larger merger-acquisition situations, large loan applications, management performance tracking, estate planning, divorce and the most dreaded of all — IRS issues. And you might want to order a formal appraisal of your company. After all, it certainly takes the guesswork out of the situation.
However, what we will discuss here is not a formal appraisal but rather the informal methods of quickly approximating the value of a business entity. All of the guidelines we’ll quote are averages derived from hundreds of completed transactions reported to national and regional databases.
Let’s First Define What You’re Selling
Most small business transfers are asset sales. This means that the buyer of the business buys certain assets of the business – usually the furniture, fixtures, equipment, inventory, the business name, and goodwill. These assets are transferred to the buyer at closing free and clear of any financial encumbrances. Generally not included in an asset sale are the cash on hand and the accounts receivable. These two items are usually retained by the seller.
The opposite of an asset sale is a corporate stock sale. In this case the purchaser buys the outstanding shares of stock in the corporation, thereby taking control of all the assets and debts of the business.
And a basic word on business value might be in order here. An on-going business entity that is earning a profit is worth more than the sum of its tangible assets. What is really being transferred in the sale of a business is an income stream. Business appraisers seek to put a value on that income stream.
There are two kinds of business appraisal guidelines. The first one — and the easiest to use — says that a business should sell for a certain percentage of annual revenue. The other formula works off of the discretionary cash flow of the business. These guidelines include all furniture, fixtures and equipment needed to do business. Inventory value, at cost, is added to the guideline results. And as stated above, the sellers of most small-to-medium size businesses do not include in the sale any cash or accounts receivable. Hence, the guidelines do not include these items.
Nor do the guidelines include any allowance for real estate. The guidelines assume that the business is in a leased location at a competitive lease rate. If real estate, cash or accounts receivable are to be included in the sale of a business, their value should be added to the guideline results.
And these guidelines assume that the business is making a net profit percentage that is average for the type of business. If the business is above or below average in profit percentage for its category, the resulting values would need to be adjusted accordingly.
If, in the worst case, the business is only breaking even or loosing money, even after the adjustments used to determine true cash flow, then these guidelines do not apply. If the business has no positive income stream to sell, then about the best price a business owner could hope for in this case would be the discounted value of the inventory, furniture, fixtures and equipment.
(1) Value as a Percentage of Annual Revenue
First, almost all profitable privately held businesses with annual sales under $5 million will sell for somewhere in the range of 20% to 80% of annual revenue. In one large database, the average price in the year 2000 of 3,8000 transactions was 44% of revenue.
Exactly where in this range of 20% to 80% of revenue the selling price of a specific business falls depends on the kind of business. Convenience stores, for example, are at the low end of the range and dry cleaners are at the high end.
If you’re working with a business broker, ask him to look up the appraisal formulas for your type of business.
(2) Value as a Multiple of Cash Flow
The other set of guidelines seeks to approximate the value of a business by applying a multiple to the discretionary cash flow that a business generates. This second guideline states that most businesses will sell for between one to six times owner’s discretionary cash flow. Exactly where in this range a specific business falls, again, depends on the type of business.
From the database of completed transactions, we know that retail establishments sell for a lower multiple than manufacturing businesses. Again, ask your professional advisor for the multiple that applies to your kind of business.
In Summary
Remember, the market determines price. Make sure that you understand the market for your kind of business. It’s a sure bet that your prospective buyers will.
And finally, if you are using a business broker in the sale of your business, work with him. He has access to myriad resources for all types of businesses. And your broker can assist you in obtaining, if you desire one, a professional and fully documented, independent third party written appraisal of your company that will take any doubt out of the situation.
After you’ve come to an accurate conclusion of your company’s value, then you need to price the business for sale. Because all buyers will want to negotiate from whatever price you quote them, you need to add in a “fudge factor” for negotiating purposes. I usually suggest 10% to 15% “padding.” Then you can use this margin as “wiggle room” as the negotiations proceed.
In the next article, we will discuss the available finance sources for your business buyer.
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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.
