BizBuySell recently released their Insight Reports for the 1st Quarter of 2015 with some very positive news. Overall “business sales” were up 6% vs. 1st quarter 2014. This level of performance is continuing a 2-year trend in business sales. Below are a few additional summary items from BizBuySell’s reports.
- Median Cash Flow for sold businesses reached a record high since 2007 of $104,000.
- Why the increase- baby boomers continue make the step to retirement, and buyers are seeing more options and access to capital from lending institutions
- Median revenue was $442,000 up from $400,000 representing a 10.5% increase.
- The average asking price was $225,000 up from $199,000, a 13% jump.
- Average sale price was $200,000 up from $175,000, up 14.3%.
- Service businesses sold lead the charge up 18% over the 1st quarter of 2014.
- Retail revenue was $537,500 vs. $437,783, up 22.7%.
- Cash flow for the retail sector averaged $99,355 up from $89,907, a 10.5% increase.
- Cash flow multiples for all businesses averaged 2.27 up from 2.21
To help show a picture of what happened in the 1st 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||203||2.69||$538,000|
|San Diego-Carlsbad-San Marcos, CA||356||2.57||$514,000|
|San Francisco-Oakland-Fremont, CA||316||3.02||$604,003|
|San Jose-Sunnyvale-Santa Clara, CA||157||3.12||$624,006|
Sentiment in the market place is stated as positive for the rest of 2015. Let’s hope that’s the case. To read the full report click on BizBuySell Quarter 1 2015 Insight Reports.
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.comRead More
Commercial lending for small business buyers has improved over the last few years. What’s your best option as a buyer… SBA, 401k, family & friends… check out this recent article with tips for buyers from Bob House, General Manager of Bizbuysell.Read More
By Nancy A. Park
Business owners are often so worried about money and obtaining enough of it to capitalize their businesses that by the time the loan documents arrive, they are ready to sign on the dotted line and be done with it. However, this is a crucial time to step back and make sure that what you are signing up for is what you bargained for. Otherwise, you might find yourself and your business hampered by so many bank consent requirements that you can’t operate your
business effectively. Or worse, you default on your loan without realizing it and there is no way to pay it when the bank calls it due early.
Loan documents are often a tall stack of long, boring and finely printed contracts with lots of boilerplate language. The dirty little secret of loan documents is that the “gotchas” are hidden in this so-called boilerplate. Have your summary of terms (or letter of interest) from the bank right next to you as you read the loan documents from beginning to end.
Then focus on the following five areas to prevent the mistakes borrowers most often make.
1. Check the facts: Is the borrower’s name and entity correct? At a minimum, check loan term (maturity), interest rate, names, payment amount, amortization, addresses and collateral description. Make sure references to interest rate, loan term, payments and other key loan terms match up with your summary of terms. Are the right properties or fixtures being included as collateral? Pay particular attention to “financial covenants,” such as maintaining a certain net worth or cash balances or ratios, and the timing of financial reporting. Be sure that the loan documents give your business time to cure problems if these requirements are not met during the loan term.
2. Review the possible defaults: There might be several places in the documents that list loan defaults, such as failure to pay by a certain time or failure to perform other loan terms. If any of the defaults seem like a real risk (now or during the loan term), then you should discuss this with your banker so you
are not backed into a corner from day one. Ask for a cure period for every default, and avoid having the loan declared due as the first remedy by the bank. Some common events leading to default are failure to pay, death of a key person in the business, or sale of the business or its major assets.
3. Representations and Warranties: Borrowers are usually asked to make numerous statements of facts or beliefs in the loan documents, called representations and warranties. Some of these can be very broad or include facts that the borrower may not actually know. It is important that you read carefully and feel comfortable that each statement is correct and within your knowledge. It is OK in many instances to limit these statements to the best of the borrower’s (your) knowledge.
4. Loan or Credit Agreements: One important loan document is a loan or credit agreement that contains the loan terms specific to your operations. Ensure the bank has not tied your hands with regard to your main line of business, such as prohibiting certain contracts or transactions. Often banks require their consent before allowing certain actions to occur. Be sure that key business activities are not restricted, or you have authority to act up to a certain limit before the consent of the bank is required. Ideally, the bank will have no say in key business decisions, but if it does, require the bank to act within certain time frame so it will not handicap your business activities.
5. Check for Other Terms: If something seems odd or overly restrictive, now is the time to get these things explained in plain language by your banker. Don’t be put off with phrases like “That’s just what the loan docs say, it never really happens that way.” Loan documents are enforced by the actual language that is included. It is extremely important that you understand everything and correct any inaccuracies. If the banker is not able to explain certain issues or change loan terms, then you will need to weigh the risk of this issue occurring against your need for the loan.
You may think that the loan docs are just a necessary evil that should be accepted the way they are to reach the end goal of cash. However, there is no substitute for actually reading all of your loan documents and understanding the actual terms. Even better, allow a lawyer knowledgeable with the customary compromises agreed to by banks and borrowers to give your loan documents a careful legal review before signing on the dotted line.
Nancy A. Park is of counsel at Best Best & Krieger LLP in the Sacramento office where she works with clients in both the private and public sector, focusing on real estate transactions, finance and business contracts. Ms. Park represents private and public real estate entities, lenders and borrowers, landlords and tenants, and large and small businesses. She can be reached at email@example.com or 916-551-2849.Read More
The initial response to the question in the title really should be: “Why do you want to know the value of your business?” This response is not intended to be flippant, but is a question that really needs to be answered.
- Does an owner need to know for estate purposes?
- Does the bank want to know for lending purposes?
- Is the owner entertaining bringing in a partner or partners?
- Is the owner thinking of selling?
- Is a divorce or partnership dispute occurring?
- Is a valuation needed for a buy-sell agreement?
There are many other reasons why knowing the value of the business may be important.
Valuing a business can be dependent on why there is a need for it, since there are almost as many different definitions of valuation as there are reasons to obtain one. For example, in a divorce or partnership breakup, each side has a vested interest in the value of the business. If the husband is the owner, he wants as low a value as possible, while his spouse wants the highest value. Likewise, if a business partner is selling half of his business to the other partner, the departing partner would want as high a value as possible.
In the case of a business loan, a lender values the business based on what he could sell the business for in order to recapture the amount of the loan. This may be just the amount of the hard assets, namely fixtures and equipment, receivables, real estate or other similar assets.
In most cases, with the possible exception of the loan value, the applicable value definition would be Fair Market Value, normally defined as: “The price at which the property would change hands between a willing buyer and a willing seller when the former is not under any compulsion to buy and the latter is not under any compulsion to sell, both parties having reasonable knowledge of relevant facts.” This definition is used by most courts.
It is interesting that in the most common definition of value, it starts off with, “The price…” Most business owners, when using the term value, really mean price. They basically want to know, “How much can I get for it if I decide to sell?” Of course, if there are legal issues, a valuation is also likely needed. In most cases, however, what the owner is looking for is a price. Unfortunately, until the business sells, there really isn’t a price.
The International Business Brokers Association (IBBA) defines price as; “The total of all consideration passed at any time between the buyer and the seller for an ownership interest in a business enterprise and may include, but is not limited to, all remuneration for tangible and intangible assets such as furniture, equipment, supplies, inventory, working capital, non-competition agreements, employment, and/or consultation agreements, licenses, customer lists, franchise fees, assumed liabilities, stock options or stock redemptions, real estate, leases, royalties, earn-outs, and future considerations.”
In short, value is something that may have to be defended, and something on which not everyone may agree. Price is very simple – it is what something sold for. It may have been negotiated; it may be the seller’s or buyer’s perception of value and the point at which their perceptions coincided (at least enough for a closing to take place) or a court may have decided.
The moral here is for a business owner to be careful what he or she asks for. Do you need a valuation, or do you just want to know what someone thinks your business will sell for?
Business brokers can be a big help in establishing value or price.Read More
It may be advisable to have an attorney review the legal documents. It is important, however, that the attorney you hire is familiar with the business buying process and has the time available to handle the paperwork on a timely basis. If the attorney does not have experience in handling business sales, you may be paying for the attorney’s education. Most business brokers have lists of attorneys who are familiar with the business buying process. An experienced attorney can be of real assistance in making sure that all of the details are handled properly. Business brokers are not qualified to give legal advice.
However, keep in mind that many attorneys are not qualified to give business advice. Your attorney will be, and should be, looking after your interests; however, you need to remember that the seller’s interests must also be considered. If the attorney goes too far in trying to protect your interests, the seller’s attorney will instruct his or her client not to proceed. The transaction must be fair for all parties. The attorney works for you, and you must have a say in how everything is done.
If you know someone who has owned their own business for a period of time, he or she may also be a valuable resource in answering your questions about how small business really works.
You have to make the final decision; that “leap of faith” between looking and actually being in business for yourself is a decision that only you can make!Read More
A professional business broker can be helpful in many ways. They can provide you with a selection of different and, in many cases, unique businesses, including many that you would not be able to find on your own. Approximately 90 percent of those who buy businesses end up with something completely different from the business that they first inquired about. Business brokers can offer you a wide variety of businesses to look at and consider.
Business brokers are also an excellent source of information about small business and the business buying process. They are familiar with the market and can advise you about trends, pricing and what is happening locally. Your business broker will handle all of the details of the business sale and will do everything possible to guide you in the right direction, including, if necessary, consulting other professionals who may be able to assist you.
Your local professional business broker is the best person to talk to about your business needs and requirements.Read More
When you find a business, the business broker will be able to answer many of your questions immediately or will research them for you. Once you get your preliminary questions answered, the typical next step is for the broker to prepare an offer based on the price and terms you feel are appropriate. This offer will generally be subject to your approval of the actual books and records supporting the figures that have been supplied to you. The main purpose of the offer is to see if the seller is willing to accept the price and terms you offered.
There isn’t much point in continuing if you and the seller can’t get together on price and terms. The offer is then presented to the seller who can approve it, reject it, or counter it with his or her own offer. You, obviously, have the decision of accepting the counter proposal from the seller or rejecting it and going on to consider other businesses.
If you and the seller agree on the price and terms, the next step is for you to do your “due diligence.” The burden is on you – the buyer – no one else. You may choose to bring in other outside advisors or to do it on your own – the choice is yours. Once you have checked and approved those areas of concern, the closing documents can be prepared, and your purchase of the business can be successfully closed. You will now join many others who, like you, have chosen to become self-employed!Read More
Certainly, you need adequate capital to buy the business and to make the improvements you want, along with maintaining some reserves in case things start off slowly. You need to be willing to work hard and, in many cases, to put in long hours. Unfortunately, many of today’s buyers are not willing to do what it takes to be successful in owning a business. A business owner has to, as they say, be the janitor, errand boy, employee, bookkeeper and “chief bottle washer!” Too many people think they can buy a business and then just sit behind a desk and work on their business plans. Owners of small businesses must be “doers.”Read More
Obviously, you want to consider only those businesses that you would feel comfortable owning and operating. “Pride of Ownership” is an important ingredient for success. You also want to consider only those businesses that you can afford with the cash you have available. In addition, the business you buy must be able to supply you with enough income – after making payments on it – to pay your bills. However, you should look at a business with an eye toward what you can do with it – how you can improve it and make it more productive and profitable. There is an old adage advising that you shouldn’t buy a business unless you feel you can do better than the present owner. Everyone has seen examples of a business that needs improvement in order to thrive, and a new owner comes in and does just that. Conversely, there are also cases where a new owner takes over a very successful business and not soon after, it either closes or is sold. It all depends on you!Read More
Generally, at the outset, a prospective seller will ask the business broker what he or she thinks the business will sell for. The business broker usually explains that a review of the financial information will be necessary before a price, or a range of prices, can be suggested for the business.
Most sellers have some idea about what they feel their business should sell for – and this is certainly taken into consideration. However, the business broker is familiar with market considerations and, by reviewing the financial records of the business, can make a recommendation of what he or she feels the market will dictate. A range is normally set with a low and high price. The more cash demanded by the seller, the lower the selling price; the smaller the cash requirements of the seller, the higher the price.
Since most business sales are seller-financed, the down payment and terms of the sale are very important. In many cases, how the sale of the business is structured is more important than the actual selling price of the business. Too many buyers make the mistake of being overly-concerned about the full price when the terms of the sale can make the difference between success and failure.
An oft-quoted anecdote may better illustrate this point: If you could buy a business that would provide you with more net profit than you thought possible even after subtracting the debt service to the seller, and you could purchase this business with a very small down payment, would you really care what the full price of the business was?Read More