Business for Sale
NEARLY 1 IN 5 BUSINESSES IS FOR SALE – AND BUYERS ARE LOOKING FOR A BUSINESS OWNERS’ LIFESTYLE.
Utah Valley Business Quarterly – Spring 2004
Ginger Woolley opened her Adventure Time day-care business in 1985 with 15 children in her care. For the next 18 years, she welcomed more children into her arms and grew to care for 150 children daily. Her staff grew to 50, and she landed contracts to operate programs in public schools and government facilities.
After 18 exhausting and fulfilling years, she hesitantly began thinking of selling. Her parents were needing more assistance, and at age 51 she began facing her own health problems. She talked to several business brokers and decided to list her business with Alpine Business Brokers,
“Within a week of posting my business for sale on the internet, I had four potential buyers,” Woolley says. “I was able to choose somebody out of those four potential buyers who would honor the kind of quality that we had built and someone who wanted to keep me in the picture as a consultant.”
Woolley, of Provo, ended up getting her asking price, but more importantly to her, she got someone who would continue to provide good care for children. “It helps me feel that I didn’t totally turn my baby up for adoption — it was an open adoption.” She says. “When you birth a business, and then raise it through its preschool, toddler and school years, it would be sad to see it go downhill.”
The sale of Adventure Time went through in August of 2003, and Woolley says the process included more variables than she expected. “For example, finding a stopping point for my payables and receivables,” she says. “In the end, all potential grievances were eliminated by clear accounting of what monies go to whom.”
Woolley’s positive experience was based largely on how she entered the process. “She had realistic expectations about her business,” says Neal Westwood, business broker with Alpine Business Brokers.
SELLING A BUSINESS
Bad days often prompt business owners to threaten to sell the business. But they should also think about selling on good days. the best time to sell your business is at the peak. Westwood says, Although this can be difficult to determine, the right time to sell is when momentum is building.
Although Selling a business has obvious benefits, Westwood says he is surprised at how many business owners close their businesses and walk away when they are ready to retired. “We find that many business owners don’t know they can sell, and they simply sell their inventory and walk away from potentially hundreds of thousands of dollars,” Westwood says.
Some business owners simply need to be educated on the selling process. “If I pick up the Yellow Pages and start talking to business owners about the possibility of selling, I find that one in four says they will be thinking of selling,” Westwood says. Nationally, one in five businesses is for sale. Of those for sale, one in four will actually get sold.
7 MONTHS – Amount of time the average business takes sell.
1 IN 5 – Number of existing businesses that are “for sale” at any given time.
1 IN 4 – Of the businesses that are for sale, only one in four nationally actually get sold.
1 IN 6 – Number of businesses that change hands each year.
82,000 – Number of privately-held businesses in Utah.
80 PERCENT – Number of buyers who end up buying a different business from the one they thought they were interested in.
85 PERCENT – Number of buyers who are buying a business for the first time.
87 PERCENT – Businesses will typically sell for 87 percent of the list price. If a seller desires all cash up front, he typically gets 70 percent to 75 percent of the asking price.
BUYING A BUSINESS
Entrepreneurial spirit can be exercised in three distinct ways: starting a venture from scratch, buying a franchise or buying and existing business. “It’s easier to buy an existing business with existing customers. This way you don’t have to go hungry for awhile while you build the business up,” says Mark Maliwauki an independent broker. “Essentially you are buying a livelihood.”
Buyers come in all ages, sizes and pocketbooks, but they do tend to be looking for a change in their lives. “Buyers are often people who are tired of the corporate life of perhaps got laid off and have a severance package that gives them some financial flexibility,” Westwood says, “Nearly 80 or 90 percent of buyers are purchasing a business for the first time.”
Often buyers will come to a business brokerage with an idea in mind of what type of business they would like to purchase. Westwood estimates that 80 percent of potential buyers who contact him end up purchasing a completely different business than they originally thought. “Buyers often are not hung up on buying into a particular industry,” Westwood says. “But the do want a business with potential and with an opportunity for a good lifestyle.”
Generally a buyer asks the following three questions before purchasing a company, Maliwauki says,
- Will the cash flow of the operation support any debt or financing I take out to acquire the business?
- Will there be enough cash after the debt service and other business expenses to provide reasonable salary?
- What are the prospects of a fair or greater than fair return on my initial investment?
WHAT IS YOUR BUSINESS WORTH?
You’ve raised your company from infancy. What is your hard work worth? If this is a question you can’t answer with confidence, you may want to consider an independent third party business appraisal, according to United Business Brokers. “By obtaining an appraisal, you give yourself and your business a competitive advantage over the competition.”
Reasons to know what your business is worth include divorce settlements, estate planning, insurance planning, raising capital, mergers, damage cases and more. In determining a business’ value, there are rules of thumb that vary with industries. A general guideline for valuating your business is two times your annual net revenue (sales minus cost of sales) or 8 to 10 times EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization) or 20 to 70 percent of annual sales.
Business Brokers analyze comparable sales in each industry. “Sometimes people think, ‘I’ll get a valuation done when I’m ready to sell.” Maliwauki says. “But a valuation will give you ideas of ways to improve the value of your company and the structure.”
A valuation may cost from $2,000 to $10,000 and will provide an accurate view of what your business is worth. the process can take two or three weeks. The business owner provides historical financial information, such as tax returns, financial statements, corporate structure documents and shareholder information.
“During a valuation, we talk about timing and things business owners can do to increase the sales price of their business when the time comes,” Maliwauki says. “This is good for both of us because when they are ready to sell, the business is usually in better shape.” Maliwauki recommends having a valuation done every three years.
VALUATION-APPRAISAL OR OPINION OF VALUE
A Valuation or Appraisal is a detailed, in-depth analysis that should only be done by individuals trained and certified by a national association such as the Institute of Business Appraisers or other national recognized Accounting or Appraisal group. These are normally only done for significant legal reasons, such as divorce settlement, a lawsuit, partnership dispute and the like. A Valuation or Appraisal is designed to determine an exact amount that your business is worth at a given instant in time. It will usually be 50 or more pages in length with substantial supporting documentation and information.
An Opinion of Value is designed to give a business owner a price range within which their business is likely to sell. It is not intended for legal purposes but to assist an owner in pricing their business for sale. And can vary depending on the terms a seller is willing to accept in a sale. For example, an all cash price is ussually70-80% lower than the price would be if the seller accepts some seller financing. Much of the same work is completed as with an appraisal and the financial’s are carefully reviewed. Most business brokers perform this “financial recasting” work as part of the sales process at no additional cost to the business owner. An Opinion of Value is also useful when determining the amount of key man insurance to purchase to protect a business against the loss of a partner or other key individual and can also give you valuable insights into what gives you business greater value.
Alpine Business Brokers offers a FREE consultation that will give you a general idea of price you might be able to expect if you were to sell your business and ideas on how to change your business to increase the value to a prospective buyer.
After a broker finds a potential buyer/seller combination, the two parties often talk over the phone. If the situation still feels like it has potential, the buyer comes to physically meet the owner in person and ask questions. If both parties are still interested, then the buyer makes an offer. If the seller doesn’t like the price, he can walk away or counter offer. Generally, the buyer makes an offer that is contingent upon review and verification of the books and records and other important information. The potential seller then provides detailed financial information. In a typical sell, the seller will continue to work with the new owner for a period of one to three months as for training.
Nationwide, the average business that sells is purchased within seven months. Businesses have sold within three weeks, and then there are some businesses that never sell. If the sell involves SBA backed bank financing ,generally it takes three months from when a buyer makes an offer until the deal goes through. If the seller has sufficient cash, or can take out a home equity loan to purchase the business, a deal can be completed in 2-4 weeks.
It’s common for buyers to invest their own money and finance the other portion through a small business loan, or often the existing owner will carry a portion of the sale over a 3-5 year term. Down payments range from 30 percent to 60 percent. If sellers are going to finance the backend, they typically want 50 to 60 percent down. “If the seller is willing to carry a note, it gives the buyer confidence that the seller believes in the business,” Maliwauki says.
THE PATH TO OWNING A BUSINESS
START FROM SCRATCH
“The advantages are you can do whatever you want to do,” says Neal Westwood, Alpine Business Brokers. “The disadvantage is the day you open your doors you do not have a customer. It takes twice as long and twice as much money as you planned to get from startup to profitability.”
BUY A FRANCHISE
“The advantages are you get the benefit of starting your own business,” Westwood says. “You may not have customers the first day you open, but someone is giving you the system, the model and the marketing material.”
BUY AN EXISTING BUSINESS
“It will cost you more money up front, but the day you walk in the door you have customers and you have income,” Westwood says. “You know you will be able to make payroll.”
WHY USE A BROKER
Putting a “For Sale” sign in your business window is problematic for several reasons. First, your employees and suppliers start to get nervous. Second, you will spend a lot of time talking to potential buyers instead of spending time maximizing the value of your business.
Business brokers list businesses for sale in nonspecific terms, which allows the seller some anonymity during the selling process. Typical listings indicate the type of business, annual revenues and cash flow information. “You don’t want people coming in and ‘kicking the tires’ during work hours,” Westwood says. “We prefer to give potential buyers a tour of the business after hours.”
Nationally, 50 potential buyers inquire about a business before it gets sold. A broker can help a seller evaluate potential buyers efficiently. “The beauty of using a broker is that the owner can focus on keeping his business growing and maximizing the value of the business,” Westwood says. “We weed through potential buyers and give the seller the best options.”
Business brokers generally more than make up their fee by streamlining the process and getting the highest price for a business. Selling your business by yourself can put you in a poor negotiating position.
There are no up front fees with with most business brokerages. They are paid a commission upon sale. National statistics show that it can take double or triple the time to sell a business if an owner does it himself – and generally for less money.
For More Information Contact
Alpine Business Brokers, LLC
240 N 1200 E, Lehi, UT 84043
Tel: (801) 224-8848
FAX: (801) 437-2629