Why Use an Experienced Business Broker?
A business broker experienced in selling businesses – especially similar businesses within the same industry as the business being evaluated – is essential to achieve an unbiased and professional business appraisal, maximizing the ultimate purchase price, and maintaining confidentiality throughout the selling process. Knowledge of recent and local business trends, as well as a firm grasp on the comparable selling prices of similar businesses in the local market, are crucial when valuing a business. Further, a business broker with enough knowledge and experience will be able to defend their financial analysis (and the determination of the annualized owner benefit) and justify the asking price to strategic buyers. The justification of the asking price by an experienced business broker is essential to maximizing the purchase price when it comes time to sell.
Initial Step of Business Sale
The first and most important step of a business sale is obtaining a professional business valuation by a local and experienced business broker. Reputable business brokers offer business valuations in a confidential manner and at no charge, as commissions are only paid in the event of a sale. A professional business valuation sets a realistic asking price and terms, which may be justified by comparing the attributes of the evaluated business against the valuations of comparable businesses on the market. The initial step of valuing a business should take place in a confidential and deliberate manner with no obligations or pressure. After a business is properly valued, the business owner can then make a more knowledgeable and informed decision about actually listing their business for sale.
Valuation Process: Gather the Right Information
When valuing a business, it is incumbent upon the business broker to have the requisite knowledge and experience to ask the right questions, obtain the right information, and anticipate issues or problems with the business that may impair its valuation or lessen the likelihood of a successful sale. By understanding the needs of potential buyers, the business broker can better prepare the business owner for what to expect during the actual sales process. Every business is unique with its own set of possible competitive advantages that allow it to sell products or provide services in a more cost efficient or effective manner than competitors. The valuation process should uncover these possible competitive advantages by focusing on the financials of the business, the operations of the business, and the background of the business.
Analyze Financials During Valuation
- During the valuation process, the business owner must allow the business broker to review their historical financials (such as tax returns or profit and loss statements).
- Otherwise, an accurate business valuation is next to impossible.
- In reviewing the financials, the business broker’s goal is to obtain the accurate adjusted owner benefit (or true economic profit derived by a working owner) during the most recent twelve month time period.
- The adjusted owner benefit is typically far different from the taxable net income which appears on a tax return because it includes non-cash expenses (depreciation), debt servicing costs (on non-assumable debt), the owner’s salary, and any personal expenses of the owner that flow through the financial statement.
- Moreover, a financial statement must be placed in its proper context and must be adjusted to reflect a normalized operating environment.
- For example, a financial statement that reflects one-time legal or occupancy costs due to isolated events that are non-recurring in nature should be normalized so that the buyer has an accurate picture of the owner benefit that they may expect to receive from the business.
- The financials of the business should also measure the extent to which the gross sales are recurring or regular in nature, the level of customer concentration as a percentage of gross sales, and the growth rate of the sales and profits over time.
- These metrics put the financials in context and allow the business broker to weigh the financials properly.
Business Operations
In addition to analyzing the financials during the business valuation, an experienced business broker must discover how exactly the business operates. Important areas to discuss include the staffing of the business, managerial roles, supply chains, marketing activities, the equipment needed to maintain the business, the billing procedures and receivables of the business, and the role of the owner. For businesses which rely upon the skill set or expertise of the owner, the owner’s role in the business should be discussed at length since it may impact the valuation of the business. The more absentee the owner’s day to day role in the business, the more likely it is for the goodwill of the business to remain intact after the closing. This improves the valuation of the business, and should be a key area of focus. It is always best for a business owner to de-emphasize their own role in the business prior to the sale so that the valuation is maintained.
Background of Business
Thoroughly reviewing the background of a business is essential to an accurate valuation. Discussion topics include how long the business has operated, how many times the business has changed hands, any special licenses needed to operate the business, and the competitive landscape of the industry in which it operates. Most buyers understand a business listing much better if they are told a coherent story about how the business started, how the business has progressed over time, and why the business owner is now selling. The more understandable the story, then the more likely it is that buyers will be comfortable making an offer to buy the business. Above all else, buyers want to be assured that the income stream of the business will remain intact and fully conveyed at closing. The more information the buyer receives in order to be assured of this then the better chances the seller has of receiving the best offer for their business.
An experienced and knowledgeable business broker understands what questions to ask a business owner during the evaluation process by anticipating the answers that a buyer will need in order to make a satisfactory offer on the business. The evaluation process centers around the financials of the business as well as information pertaining to its background and daily operations. Once the information is obtained, the business broker should be able to advise the business owner as to the best possible asking price and deal terms for their business.
Give Martin at Five Star Business Brokers of Palm Beach County a call today for a FREE evaluation of your business.