|
|
|
|
 Almost
every business has attributes that are unique; therefore, making
it more attractive to a prospective buyer. The financials of the
business are certainly important, but most buyers look beyond them.
If two similar businesses have about the same financial status, what
makes one different from the other? The factors that make a business
unique will also make it more desirable – and may also dramatically
increase the price. (Keep in mind that unless they are transferable
to a new owner, they will have little value.) Here are several to
consider.
Difficulty of Replication
Any business possessing one or more products or services
that are not easily replicated has an advantage over a business that
is easily replicable. For example, not just anyone can open a CPA firm
or a medical or dental practice. On the other hand, special licensing
is not necessary to open a video rental store. Renting space, installing
shelving and computer systems and purchasing videos are relatively
easy, but a business that has special licensing arrangements with specific
suppliers is not easily replicable. For example, being the local outlet
for Department 56 collectibles is a valuable licensing arrangement
as are those for Hallmark Cards or Ace Hardware. Are these agreements
in writing and are they transferable? A Coldwell Banker real estate
office may be easy to replicate, but the franchise name makes it unique
within a certain geographic area.
Intangible Assets
A good example of a unique intangible asset would
be a long-term lease in a favorable location that is transferable to
a new owner. As just discussed above, a well-recognized franchise can
be a valuable intangible asset. Today’s economy has created a
wealth of intangible assets, many of which can be easily transferred
to a new owner. Mailing lists and subscriber lists are an invaluable
asset to a magazine or newsletter business. A well-established mailing
program for new prospects or to keep in touch with old ones is also
a good example of a valuable intangible asset. A book store publishes
a monthly newsletter with reviews of new books or recommendations and
mails it to their existing mailing list of customers, but also to new
arrivals in town. The new owner can use existing materials and lists
on an on-going basis to maintain or increase revenues.
Reputation
Some businesses are known for unique characteristics,
such as a restaurant that has built a reputation for a special food
item or even its entire menu. Smokey Bones, although a barbecue franchise,
is well-known for its special donuts, which seems incongruous to a
barbecue place. Many small independent businesses are known all over
town for their special service (including their willingness to deliver)
or friendliness, or they always have “just what you need.” These
businesses just have that special something that everyone knows about
which makes their business unique. This is transferable, but it is
up to the new owner to maintain it.
Proprietary Products, Services or Technology
The card shop that has a special engraving process
for announcements, invitations, etc., draws customers from miles around.
This is true also of the hardware store that sharpens knives and repairs
window screens because it has the specialized equipment to do so. The
restaurant with the secret sauce or the business with proprietary computer
software that controls the business operations — these are businesses
with unique features that add to value. Many businesses rely on trade
secrets, a patented item or a special trademark that makes them unique.
There are many other factors that can be unique to
a business that add value when it comes time to sell. Other businesses
have unique characteristics that cross over all of the factors mentioned
above. Some businesses, although local or regional, have a particular
brand-name represented or one they have created. The state of Vermont
has done an excellent job in promoting small businesses within the
state. The idea is that if it is made in Vermont it is unique to the
state and therefore of excellent quality. The tag line “Made
in Vermont” does have a unique caché. All ice cream lovers
have heard of Ben & Jerry’s and the unique names assigned
to their ice cream flavors. The name alone symbolizes quality – and
being made in Vermont doesn’t hurt. The company sold several
years ago and it will be interesting to see if the uniqueness wears
off because of the sale. Was it really transferable?
All things considered, when it comes time to sell,
business owners have to look beyond their numbers for those characteristics
that make their business unique and special.
|
|
|
Arriving
At A Satisfactory Price
When selling a business – or buying one – it is important for the
seller to determine his or her lowest acceptable price and for the buyer to determine
the highest possible price he or she will pay for the business. Following are
several factors that buyers generally consider when attempting to arrive at a
target price.
Quality of earnings
It is fairly common for businesses to have some non-recurring expenses every
year. It might be a new piece of equipment, a legal situation, a write-down of
inventory. In too many cases, these non-recurring expenses are treated as add-backs,
even though the amount or similar one occurs every year so it really shouldn’t
be treated as an add-back. To do so artificially inflates earnings. It’s
similar to a one-time event such as the sale of real estate with the proceeds
added to income; thus, again, inflating the true earning capability of the business.
 Sustainability of earnings
A buyer wants to know if the earnings of the business will continue. Is the business
at the top of its earning potential –or at the beginning or somewhere in
the middle? The buyer is concerned about the earnings potential of the business – after
the acquisition!
Verification of the information
Is the information accurate or is the seller hiding some skeleton in the closet?
Is everything accounted for or are there some uncollected receivables – or
worse, some unpaid payables? Are there any employee issues, litigation, or governmental
action pending?
Some Key Questions
Buyers generally have some questions that need answering prior to making an offer.
Some of the more important ones are:
• What’s for sale? What is actually included in the price – real
estate,
inventory, receivables?
• Are all of the fixtures and equipment included or is some of it leased?
How serviceable are the important pieces of equipment? Does the seller have any
personal items
that are not included?
• How dependent is the business on the owner? Do the key employees have
employment
agreements or non-competes?
• Is the inventory current or is some of it obsolete and therefore not
salable?
• Is the cash flow sufficient to operate the business on a current basis
or will
the buyer need additional working capital?
• Who are the key suppliers and customers or clients?
Defining Earnings
Are the earnings expressed as EBIT (Earnings Before Interest & Taxes) or
as EBITDA (add Depreciation and Amortization to EBIT)? Or is it expressed, as
is most commonly used in small business, as SDE (Seller’s Discretionary
Earnings). Since a multiplier is generally applied to one of the expressions
of earnings mentioned, determining which one being used is critical. Add-backs
are used in all of the above mentioned earnings; the main difference is that
SDE is really EBIT with the owner’s salary added to it. The thinking is
that the important consideration in measuring the earning power of a small business
is the amount of cash the business throws off – thus the word discretionary.
How much cash is the seller actually earning from the operations of the business?
It is important to know if the earnings being reviewed are for the current year,
the previous year or represent a projection for the coming year. If a projection,
are the earnings based on an annualization of the current year? Instead of apples
and oranges, the pricing basket should contain items that all look the same.
A professional business intermediary is experienced in the pricing of a business
and should be involved from the beginning. If all of the pricing is done professionally
and correctly – everyone will be “singing from the same hymnal” or,
even better, on the same page.
|
|
|
 |
 The
answer to this question is about the same
as the proverbial “How long is
a piece of string?” However, a recent
survey reported that it took, on average,
187 days to sell a business, with the median
time being 147 days. What this boils down
to is that it takes approximately six months
from the time a business hits the market
to the time it closes.
This perhaps useless statistic does indicate,
however, that businesses are not sold overnight.
In fact, some very good businesses may take
much longer. In order to maximize the price
of a business, the transaction necessarily
takes time. The professional business broker
gathers all of the information including
the history of the business, its operational
aspects, the financial data and anything
else that the prospective buyer might want
to know. The financial information is analyzed
and recasted to present an accurate picture
of the business. A profile has to be written
and a marketing strategy created. Selling
a business today compared to years ago is
much more than just placing an ad in the
local paper.
Although print advertising is still quite
effective, today’s marketing efforts
now must include internet marketing, trade
journals, industry web sites and ethnic publications.
Response from internet sites is growing rapidly,
but they must be handled quite differently
from newspaper responses. In addition, business
brokers must now maintain their own web sites
in order to reach potential buyers. Business
brokers also search their own records for
potential buyers, in addition to contacting
them by mail and email.
Every year, the time from going to market
to the closing of the sale of a business
increases. In addition to the increased preparation
time that business brokers take to gather
all of the information necessary to adequately
present the business, here are some other
reasons for the increased time:
• Deals are much more complicated today. Very
few sales, even the smaller ones, escape
the scrutiny of the lawyers and other outside
advisors. Closing the sale today involves
much more paperwork, and there are additional
governmental regulations that have to be
complied with at all levels. The time from
the buyer and seller coming to agreement
to the time of the close has been greatly
lengthened.
•
Buyers are more knowledgeable. There is much
more information available today, in part
due to the internet and increased media coverage
of privately held businesses. Today’s
buyer feels that he or she can price the
business; that they know what to look for
and where to go for assistance.
•
Buyers are much more number-conscious than
in years past. He or she has probably been
involved in the corporate world and is, or
thinks he is, knowledgeable in all businesses.
If the numbers don’t work, the business
most likely won’t sell. The better
the quality of the financials, the easier
it is for the business broker to prepare
the business for sale. The more information
gathering that is necessary, the longer it
takes to the close. Sellers have to understand
that taking the “nickels and dimes” today
will cost thousands and thousands of dollars
later.
Here
Is A List Of The Key Items Needed
Prior To Taking The Business To Market:
• Three
years’ profit & loss statements
• Federal income tax returns for the business
• List of current fixtures and equipment
• The lease and related documents
• Copy of the franchise agreement (if applicable)
• List of loans and encumbrances related to the business with balances
and payment schedules
• Copies of any equipment leases
• The approximate amount of inventory on hand
• Names of outside advisors
• Copies of marketing materials and any other promotional pieces
• Copy of the Operational Manual (if available)
• A short history of the business and what it does |
|
All
of the above has created a new roadblock of time
that business broker professionals
did not have to deal with years ago. Sellers
can help shorten the time it takes by gathering
as much information as possible and making
sure the financials adequately reflect
the business – before trying to sell it.
The business owner should call a business
broker professional when he or she is first
contemplating a sale. The broker can assist
in the process and advise the seller about
just what is required. By doing this, the
business will get to the marketplace in a
more timely fashion.
|
