Today’s Business Scene Is Provided By:
Alpine Business Brokers
Call us today at 801.224.8848 or e-mail us at email@example.com
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.
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.
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?
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.