Small Business Transactions Down Slightly From 3rd Quarter 2014 reported by BizBuySell
As reported in BizBuySell’s recent Q3 2015 Insider’s Report the number of business transactions in the 3rd quarter of 2015 are down. This is compared to the markets record high level in 2014. Bob House, Group GM of BizBuySell.com andBizQuest.com said “After a very active 2014, this year’s small drop in transactions should be viewed as a stabilization of the market rather than a trend in the opposite direction. Overall, the buying-selling environment remains very robust.”
Below are some notables from the report. To view the entire report click here.
- Small Business transactions down 9% compared to 3rd quarter 2014 totaling 1814 business’s changing hands.
- Financial stability of business’s listed grew 4% to $450,000 in average revenue.
- Retail industry saw the biggest decline at 17% fewer transactions
- Pacific region down 22% in business sales transactions
- The median revenue of small businesses has been on a steady incline since mid-2012, leading to higher sale prices upon exit.
- BizBuySell Buyer-Seller Confidence Index reported a Seller Confidence Score of 62, up after two consecutive years at 56.
Regional Business Listed Data*
California Highlights | # listed | Cash Flow Multiple | Hypothetical 250kCash Flow x Multiple = Listing Price |
Contra Costa-Alameda-Solano, CA | 189 | 2.75 | $687,500 |
Sacramento–Arden-Arcade–Roseville, CA | 212 | 2.85 | $712,500 |
San Diego-Carlsbad-San Marcos, CA | 401 | 2.50 | $625,000 |
San Francisco-Oakland-Fremont, CA | 363 | 3.17 | $792,500 |
San Jose-Sunnyvale-Santa Clara, CA | 162 | 2.96 | $740,000 |
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Are there Advantages to Seller Financing?
Business owners who want to sell their business are often told by business brokers and intermediaries that they will have to consider financing the sale themselves. Many owners would like to receive all cash, but many also understand that there is very little outside financing available from banks or other sources. The only source left is the seller of the business.
Buyers usually feel that businesses should be able to pay for themselves. They are wary of sellers who demand all cash. Is the seller really saying that the business can’t support any debt or is he or she saying, “the business isn’t any good and I want my cash out of it now, just in case?” They are also wary of the seller who wants the carry-back note fully collateralized by the buyer. First, the buyer has probably used most of his or her assets to assemble the down payment and additional funds necessary to go into business. Most buyers are reluctant to use what little assets they may have left to secure the seller’s note. The buyer will ask, “what is the seller not telling me and/or why wouldn’t the business provide sufficient collateral?”
Here are some reasons why a seller might want to consider seller financing the sale of his or her business:
- There is a greater chance that the business will sell with seller financing. In fact, in many cases, the business won’t sell for cash, unless the owner is willing to lower the price substantially.
- The seller will usually receive a much higher price for the business by financing a portion of the sale price.
- Most sellers are unaware of how much the interest on the sale increases their actual selling price. For example, a seller carry-back note at 8 percent carried over nine years will actually double the amount carried. $100,000 at 8 percent over a nine year period results in the seller receiving $200,000.
- With interest rates currently the lowest in years, sellers usually get a higher rate from a buyer than they would get from any financial institution.
- Sellers may also discover that, in many cases, the tax consequences of financing the sale themselves may be more advantageous than those for an all-cash sale.
- Financing the sale tells the buyer that the seller has enough confidence that the business will, or can, pay for itself.
Certainly, the biggest concern the seller has is whether or not the new owner will be successful enough to pay off the loan the seller has agreed to provide as a condition of the sale. Here are some obvious, but important, factors that may indicate the stability of the buyer:
- How long has the buyer lived in the same house or been a home owner?
- What is the buyer’s work history?
- How do the buyer’s personal references check out?
- Does the buyer have a satisfactory banking relationship?
Advantages of Seller Financing for the Buyer
- Lower interest
- Longer term
- No fees
- Seller stays involved
- Less paperwork
- Easier to negotiate
© Copyright 2015 Business Brokerage Press, Inc.
Read MoreWhat Makes Up The Value Of A Business?
Many courts and the Internal Revenue Service have defined fair market value as: “The amount at which property would exchange between a willing buyer and a willing seller, neither being under any compulsion to buy or sell and both having a reasonable knowledge of relevant facts.” You may have to read this several times to get the gist and depth of this definition.
The problem with this definition is that the conditions cited rarely exist in the real world of selling or buying a business. For example, the definition states that the sale of the business cannot be conducted under any duress, and neither the buyer nor the seller can be pushed into the transaction. Such factors as emotion and sentimental value cannot be a part of the sale. Surprisingly, under this definition, no actual sale or purchase has to take place to establish fair market value. That’s probably because one could never take place using the definition.
So what does make up the value of a privately held business? A business consists of tangible and intangible assets. The tangible assets are the most visible and the ones on which buyers too often base a judgment on the value of a business. Factors of value, fixtures, equipment and leasehold improvements are often valued first by the buyer. Well maintained equipment and attractive interior surroundings are the first things a buyer sees when visiting a business for sale. Make no mistake, regardless of what prospective buyers may say, the emotional impact of a physically well-maintained business can be a very positive factor. In addition, it is much easier to finance tangible assets than intangible ones.
However, buyers have to consider what is really behind those well-maintained tangible assets. There are many businesses, especially today, in which physical assets play a very small part in the success of the business. These intangible factors include: the business’ reputation with its customer or client base, and within its industry; mailing lists and customer/client lists; quality of product or service; reputation with its vendors and suppliers; strength of the business’ technology and other systems; plus many other factors that can add a lot more value to the price of the business than can shiny equipment.
Although the intangible assets listed above cannot be seen, they are certainly an important part of the business – and purchase price. Businesses that don’t need expensive fixtures and equipment can, in many cases, be expanded more quickly and inexpensively because they do not require cash-intensive equipment purchases. Buyers, to their own detriment, do not want to pay the same price for equivalent cash flow for businesses that do not have lots of equipment. They want to buy tangible assets.
Business brokers and intermediaries know how to point out to prospective buyers the advantages of businesses that may not require lots of equipment but have those all-important intangible assets that create steady cash flow. Business owners who have a service or other type of business that does not rely on the heavy use of tangible assets and are considering selling, should talk to their professional business broker/intermediary who can point out the pluses and the hidden assets of the business.
© Copyright 2015 Business Brokerage Press, Inc.
Read MoreFinancial Management for the Closely Held Business, presented by Tri Counties Bank
Tri Counties Bank locally in the central valley is presenting four 2-day Business Financial Management seminars in Grass Valley, Sacramento, Chico, and Redding in September and October. Here’s a brief summary and for more information on attending click here.
“Businesses face tough challenges and unique opportunities. The financial success or failure of a business lies in its owner’s ability to manage through the challenges and capitalize on the opportunities. Now you can learn to proactively control the finances of your company through business-tested financial management techniques and maximize profits through more informed decision-making.
This two-day seminar explains in simple, clear language what financial management is and why it can greatly improve your profitability. We guarantee that you will walk away with tangible tools that you can put to use immediately in your own company.”
September 15-16, 2015 Grass Valley
September 29-30th, 2015 Sacramento
October 13-14th, 2015 Chico
October 27-28th, 2015- Redding
To learn more and register on line click here.
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When Running a Business When is it Time to Raise Prices?
Increasing the price of your products or services is, in most cases, the most difficult decision a business owner has to make. Looking at the negatives is easy.
• Our business is too competitive to increase prices.
• Our customers/clients are used to our pricing.
• Customers are too price-conscious.
• We won’t be able to get new customers/clients.
• We are known for low prices.
• We have a lot of repeat customers, they won’t pay more.
The list of reasons why prices shouldn’t increase could go on and on. The fear is always that people won’t pay the increase and profits will suffer.
Before considering a to raise prices, one must look at their current pricing method. Do you work on a cost plus a certain mark-up? If you use a mark-up percentage, are all items marked up by the same percentage? Do you try to maintain a price comparable to the competition? If you work on an hourly rate, for example consulting, when was your last increase? Have costs increased and have you increased prices to compensate for them?
Looking at the positives is also easy. Profits will increase; and the price of the business will increase based on the increase in sales and profits. Funds will be generated to do that advertising or promotion you have always wanted to do. With increased profits you can hire that extra salesperson you know will increase business; you can install the technology you know will increase service and lower costs.
As Ravi Mohammed said in his book, The Art of Pricing, “Let me ask you, will a 1% price increase really cause your customers to stop purchasing from you?” A 1% increase on a business doing $5,000,000 a year is $50,000 to the bottom line. On a business with sales of just $500,000, a price increase of only 2% would bring in $10,000 to the bottom line.
One does not need to increase prices across the board. On fast-selling items, increase the price more than on slow-moving items. By doing so, you can test the waters on increasing prices. As Ravi Mohammed also points out, “McDonald’s profit on hamburgers is marginal, but it has substantial profits on French fries and soft-drinks.”
You many decide not to increase your prices, but at least you have taken a look at your pricing policies.
© Copyright 2015 Business Brokerage Press, Inc.
Read MoreMerger & Acquisition Trends for Summer 2015
A recent article on Axial Forum by Emily Sackett explores Merger & Acquisition market results so far for the summer of 2015. Here are a few highlights.
- By September, we could reach a trillion dollars in proposed deals for the summer, beating out the previous seasonal high in 2007.
- A significant portion of this summer surge is being led by corporate buyers who are scooping up acquisition targets and borrowing like rates may rise tomorrow to fund current or future deals.
- In June and July 933 deals came to market.
- While historically August can prove to be a quieter month, the momentum to date is leading many to believe that a summer slowdown is nowhere in sight and that we could be headed for one the most active years on record for dealmakers.
In recent blogs we have also reported the positive trend in California for business sales as well. These current trends begs the question… “is now the best time to sell my business?” Naturally it’s impossible to predict the future but the market is showing positive signs for sellers looking to exit their business. And with the retiring baby boomer trend continuing to heat up some predict the increased volume of business’s for sale will create more of a buyer’s market in the years coming ahead. It’s never too early to have to starting discussing the proper exit for anyone’s business.
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Small Business For Sale Listings Reach Six Year High per BizBuySell’s 2nd Quarter 2015 Insight Report
BizBuySell recently released their Business For Sale Insight Reports for the 2nd Quarter of 2015 stating growing supply & Demand continues high transaction trend. Overall “business sales” were up 12% vs. 2nd quarter 2014. This level of performance has not been seen since 2009. Below are a few additional summary items from BizBuySell’s reports.
- Median small business asking price grew 13% in the past year, while sale price increased 12%.
- Manufacturing businesses led the recent growth spurt with a 29 percent uptick from the same period last year.
- Business listings in the restaurant (12 percent), service (11 percent) and retail (9 percent) industries also experienced year-over-year supply growth.
- The median revenue of sold businesses increased to $450,000 this quarter (the highest on record since report inception in 2007).
- The median cash flow rose slightly to 102,995 from $100,000 at the same time last year.
- California saw large increases in the number of small businesses on the market.
- San Jose (up 64 percent)
- Sacramento (up 42 percent)
- San Francisco (up 31 percent)
- San Diego (grew by 18 percent)
- Los Angeles (7 percent increase)
To help show a picture of what happened in the 2nd quarter of 2015 for California below is a chart showing the number of business’s listed and the average cash flow multiple. We also added a column using $200,000 cash flow as an example to show a California market comparison.
California Highlights | # listed | Cash Flow Multiple | Hypothetical 200kCash Flow x Multiple = Listing Price |
Contra Costa-Alameda-Solano, CA | 187 | 2.85 | $570,000 |
Sacramento–Arden-Arcade–Roseville, CA | 252 | 2.82 | $564,000 |
San Diego-Carlsbad-San Marcos, CA | 389 | 2.53 | $506,000 |
San Francisco-Oakland-Fremont, CA | 342 | 3.10 | $620,000 |
San Jose-Sunnyvale-Santa Clara, CA | 184 | 3.04 | $608,000 |
“There will always be some outliers, but this quarter’s data confirms that small business listings, transactions and financials are all continuing on a great trend,” Bob House, Group GM of BizBuySell.com and BizQuest.com said. “Nationally, the transaction volumes, key financial indicators and economic environment during the first half of 2015 point to another robust business-for-sale market in the second half of the year.”
Want to learn about selling your business and what your own personal Sellability Score is? Click here.
If you’re interested in learning about your selling options, getting a professional business valuation, or getting help creating an exit strategy, please feel free to CALL Evolution Advisors at 916.993.5433 or visit our website: www.EvoBizSales.com
Read MoreExpect the Unexpected when Selling Your Business
According to the experts, a business owner should lay the groundwork for selling at about the same time as he or she first opens the door for business. Great advice, but it rarely happens. Most sales of businesses are event-driven; i.e., an event or circumstance such as partnership problems, divorce, health, or just plain burn-out pushes an owner into selling a business. The business owner now becomes a seller without considering the unexpected issues that almost always occur. Here are some questions that need answering before selling:
How much is your time worth?
Business owners have a business to run, and they are generally the mainstay of the operation. If they are too busy trying to meet with prospective buyers, answering their questions and getting necessary data to them, the business may play second fiddle. Buyers can be very demanding and ignoring them may not only kill a possible sale, but will also reduce the purchase price. Using the services of a business broker is a great time saver. In addition to all of the other duties they will handle, they will make sure that the owners meet only with qualified prospects and at a time convenient for the owner.
How involved do you need to be?
Some business owners feel that they need to know every detail of a buyer’s visit to the business. They want to be involved in this, and in every other detail of the process. This takes away from running the business. Owners must realize that prospective buyers assume that the business will continue to run successfully during the sales process and through the closing. Micromanaging the sales process takes time from the business. This is another reason to use the services of a business broker. They can handle the details of the selling process, and they will keep sellers informed every step of the way – leaving the owner with the time necessary to run the business. However, they are well aware that it is the seller’s business and that the seller makes the decisions.
Are there any other decision makers?
Sellers sometimes forget that they have a silent partner, or that they put their spouse’s name on the liquor license, or that they sold some stock to their brother-in-law in exchange for some operating capital. These part-owners might very well come out of the woodwork and create issues that can thwart a sale. A silent partner ceases to be silent and expects a much bigger slice of the pie than the seller is willing to give. The answer is for the seller to gather approvals of all the parties in writing prior to going to market.
How important is confidentiality?
This is always an important issue. Leaks can occur. The more active the selling process (which benefits the seller and greatly increases the chance of a higher price), the more likely the word will get out. Sellers should have a back-up plan in case confidentiality is breached. Business brokers are experienced in maintaining confidentiality and can be a big help in this area.
Read MoreMaking The Decision To Sell Your Business
Making the decision to Sell your business can be a traumatic and emotional event. In fact, “seller’s remorse” is one of the major reasons that deals don’t close. The business may have been in the family for generations. The owner may have built it from scratch or bought it and made it very successful. However, there are times when selling is the best course to take. Here are a few of them.
- Burnout – This is a major reason, according to industry experts, why owners consider selling their business. The long hours and 7-day workweeks can take their toll. In other cases, the business may just become boring – the challenge gone. Losing interest in one’s business usually indicates that it is time to sell.
- No one to take over – Sons and daughters can be disenchanted with the family business by the time it’s their turn to take over. Family members often wish to move on to their own lives and careers.
- Personal problems – Events such as illness, divorce, and partnership issues do occur and many times force the sale of a company. Unfortunately, one cannot predict such events, and too many times, a forced sale does not bring maximum value. Proper planning and documentation can preclude an emergency sale.
- Cashing-out – Many company owners have much of their personal net worth invested in their business. This can present a lack of liquidity. Other than borrowing against the assets of the business, an owner’s only option is to sell it. They have spent years building, and now it’s time to cash-in.
- Outside pressure – Successful businesses create competition. It may be building to the point where it is easier to join it, than to fight it. A business may be standing still, while larger companies are moving in.
- An offer from “out of the blue” – The business may not even be on the market, but someone or some other company may see an opportunity. An owner answers the telephone and the voice on the other end says, “We would like to buy your company.”
There are obviously many other reasons why businesses are sold. The paramount issue is that they should not be placed on the market if the owner or principals are not convinced it’s time. And consider an old law that says, “The time to prepare to sell is the day you start or take over the business.”
Copyright 2015 Business Brokerage Press, Inc.
Read MoreWhat Serious Buyers Look for in Buying a Business
Obviously, serious buyers want to carefully look at the financials of a company under consideration and all of the other major aspects of the company. However, there are a few other areas that the serious buyer will investigate that sellers may overlook.
The Industry – The buyer will want to take a serious look at the industry itself, the customers, the suppliers, the competition, etc. This investigation will cover the strengths, weaknesses, threats from competition, and opportunities of the potential acquisition. With the growth of the “big box” retailers, much power has shifted from the manufacturer to the retailer. A manufacturer may want to increase prices, but if Wal-Mart says no, it’s a very powerful no.
Discretionary Costs – Some sellers will reduce their expenses in discretionary areas such as advertising, public relations, research and development, thus making for a higher bottom line. However, these cuts will hurt the future bottom line, and smart buyers will take notice of this.
Obsolete Inventory – This is another area that buyers take a serious look at and that can impact the purchase price. No one wants to pay for inventory that is unusable, antiquated or unsalable.
Wages and Salaries – A company may be paying minimum wages, or offering few or low-cost benefits, a limited retirement program, etc. These cost-saving devices will make the bottom line look good, but employee turnover may create expensive problems later on. If the target company is to be absorbed by another, compensation issues could be critical.
Capital Expenditures – The serious buyer will take a very close look at machinery and equipment to make sure they are up to date and on a par with, or superior to, that of the competition. Replacing outdated equipment can modify projections and may affect an offering price.
Cash Flow – Serious buyers will take a long look at the cash flow statements and the areas that affect them. The buyer wants to know that the business will continue to generate positive cash flow after the acquisition (i.e.: after servicing the debt and after paying a reasonable salary to the owner or general manager).
Other areas that sellers overlook, but that the serious buyer does not are: internal controls/systems, financial agreements with lenders, governmental controls, anti-trust issues, legal matters and environmental concerns.
© Copyright 2015 Business Brokerage Press, Inc.
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