Selling a business: what is your business worth, part two

owner’s compensation tends to be the area of biggest adjustment in an income statement

As you read in part one of selling a business: what is your business worth, a seller’s price expectation needs to be in line with market reality.  Most financial statements of small businesses are prepared to minimize the tax burden for the company and its owners.  To reflect the company’s true earnings, we need to recast/normalize the balance sheet and income (profit and loss) statement.

Recasting income statements

In a small- to medium-sized business, owner’s compensation is often based on what the business can afford. It tends to be the area of biggest adjustment in an income statement, where we “add back” expenses considered discretionary, extraordinary, non-recurring or non-cash. We also add back interest as the new owner may have a different capital structure.

Owner’s compensation can include pension plans, profit sharing, health and life insurance, auto travel, entertainment, meals, memberships, dues, fees, subscriptions, salary, wages, bonus and payroll taxes, family and relatives on payroll.

In recasting, you need to ask:  Will the new owner incur this expense to obtain these earnings?

This process can take some time and requires the business broker/appraiser to have the right questions.

Selling a business: what is your business worth?

The worth of a business lies in the eyes of the market

If beauty is in the eye of the beholder, then the worth of a business lies in the eye of the market. For the market is really what decides the price an owner will get for their business when they go to sell – the scenario most have in mind when they ask what their business is worth.

Determining that value, the most probably selling price (MPSP), is an art that’s goes beyond valuation.   Brokers at our company have expertise in both.

We start by formally appraising the value of the business to determine Fair Market Value (FMV), using methodology of the International Business Brokers Association (IBBA), the Institute of Business Appraisers (IBA) and the National Equipment and Business Brokers Institute (NEBB). Sunbelt has staff certified by each;  I am a Life Member of IBA and teach business valuation for IBBA and NEBB.

From the FMV, we determine the MPSP. This calculation represents a reasonable price, factoring the true (recast) earnings past and future, what the market is willing to pay, and motivation. The seller can then negotiate on an informed basis.

How the MPSP differs from value

Selling a business: top financial factors to build value

Bad record-keeping is the top roadblock to selling a business

Does your accountant dread your visit? Bad record keeping is, in fact, the biggest roadblock to selling a business.

Buyers want a business with a proven track record of consistent financial performance with solid/growing revenue and earnings. Yet, most of us are rather flabby when it comes to fiscal fitness.  Spending some time with a trainer/coach can boost your strength and health.  Let’s start with some top financial drivers of business value.  Focusing on these will make it easier for you to sell your business and get you more money–then as well as now.  Assess your own business, determine which factors affect your business the most and prioritize what you want to work on.

Keeping (in the) good books

A proper set of books prepared with proper accounting software is a necessity. Your documents need to be current and correct, demonstrating timely remittances and filings.

Compliance is essential: issues with the Canadian Revenue Agency (CRA) or others can freeze your accounts and destroy your business.  Continuity is also important.  Are you dependent on a single employee who could leave?

Outsourced bookkeeping provides efficiencies that small businesses can benefit from.  Businesses pay for work that’s done, not standby hours. Clean and compliant books will contribute to a good relationship with your accountant and save you dollars there, too.

A good bookkeeper will also help you understand your numbers. They can do forecasting, financial analysis, identify cash flow risks, and provide much more than effective use of a software program.

It’s important that owners keep records and communicate changes to the business. They’ll often dispose of assets or sign a new lease and forget to advise the person doing their books.

Why is this business for sale?

Burnout is the top reason people sell their business

Potential buyers of a business want to know upfront why it’s for sale. They’re naturally suspicious–if this is such a good business, then why is the owner selling?  What is wrong?

In all likelihood, the business is continuing to provide a good living for the owners just as it always has; what’s changed is the owner, not the business. If that’s not the case, we’ll know it and so will you. Full disclosure is essential if we’re going to undertake the sale.

Just as we as homeowners sometimes move from one perfectly good house to another, there is nothing at all wrong with the first house; we just decide to move to another one. Sometimes we change jobs, change locations, change wives, change husbands, things just change as we go through life. Sometimes the change results in a need to sell a perfectly functioning business that has been providing for the owners, just as it is supposed to, but the owner wants or needs to sell the business.

Let’s take a closer look at these owner wants or needs.

Is now the time to sell my business?

Business owners want to know: should they sell now or later

The recession has thrown many business owners off track, leaving them unsure and unequipped, akin to driving in an unfamiliar area without a GPS or map or navigating the wilderness without a compass.

For many who’ve lost 25% to 50% of their savings in the market, the paved road to retirement is now full of potholes.  Do they keep on course, or take a detour?

Business owners want to know:  should they wait a few years before selling their business  or should they go ahead and sell it now?  If you own a business, maybe it’s a question you’ve been asking as well.

If you can afford to retire with the proceeds of the sale now, do it now:

• There is a good market for quality businesses. Businesses that are currently performing well are selling at the same multiples as before the recession.  Those that are under performing are selling at lower multiples than they would have prior to the recession.
• There are many more buyers chasing fewer businesses.  It’s true that buyers have also lost part of their savings in the markets, leaving them with less cash for a down payment.  However, with downsizing, rightsizing, plant closures and layoffs, there are more individuals actively seeking out other means to support themselves and their families.
• You may have to finance a bit more of the transaction than a couple of years ago but if the business is performing well, you will get top dollar. Vendor financing can add as much as 30% to the price of your business and you get the interest on the financing on top of that.  Most small business sales in Canada are financed 50% by the seller, with a note that runs three to five years . They can also be financed in part through the Canada Small Business Financing (CSBF) program or  a loan from the Business Development Bank of Canada (BDC), with the seller providing a note for 20% of the transaction.

Waiting a few years is risky and may result in a much lower price

Maybe you’ve landed in one of those potholes. You don’t have enough to retire on and selling your business will still leave you short. You’re stuck managing your business a few more years to make up the losses.  It’s your only choice.  You need to understand the consequences of that decision, though.

Business brokers help buyers and sellers, part 2

In part one of this post, we explored how business brokers bring buyers and and sellers together, providing the all-important expertise to bring the deal to a conclusion that works for both.  Here are some takeaway points specific to each party.

Some points for buyers

There is no perfect business-only some that are better for you than others. The key is to find the right “opportunity” for you to make it your perfect business.

• A business broker will inventory your skills, interest and experience, as well as your personal and financial goals.  This will help match you with business opportunities best suited to your profile and objectives.
• You will want to look at price, terms, income, cash flow  and location and be sure the business serves your financial needs. A business broker will help you gather all the necessary information at the appropriate stages.  You’ll find that the true value of a business is not always as obvious as the numbers on the spreadsheet.
• Buy the business for a negotiated price with a down payment that works for you.  Ensure that the cash flow is enough to cover your financing payments while still leaving you enough money to live on.
• The terms and conditions on the balance due note can be anything that works and is agreeable to both parties.

Some points for sellers

On the flip side our brokerage won’t accept assignments unless we think we can successfully achieve the seller’s objectives.   For one thing, the seller’s expectations need to be in line with the market reality.

• The business broker starts by formally assessing the value of the business. This value is not negotiated.  From there, we determine the most probable selling price (MPSP).  This represents a reasonable price, factoring the true earnings and what the market is willing to pay.  The seller can then negotiate on an informed basis.
• A business broker that’s associated with a well-established firm can expose your business opportunity to hundreds of prospective buyers without employees, customers or competitors knowing that the business is for sale.
• Most sellers are unaware of how much interest they can generate by offering financing. To buyers, it’s one indication that sellers are confident that the business will pay for itself.