The Sign Businesses For Sale Blog
5 Big Questions to Consider when Financing a Business Sale
How should the purchase of a business be structured? This is a point that you’ll want to address early in the sale process. For most people, buying or selling a business is one of the most, if not the most, important business decision that they will ever make. For this reason, it is vital not to wait until the last minute to structure your deal. Let’s turn our attention to the most significant questions that you need to answer when entering the sales process.
1. What is My Lowest Price?
The first question you should ask yourself is, “What is the lowest price I’m willing to take?” If an offer is made, the last thing you want is to be sitting around trying to decide if you can take a given offer at a given price. You need to be ready to jump if the right offer is made.
2. What are the Tax Implications?
Secondly, you’ll want to seriously consider the tax consequences of any sale. Taxes are always a fact of life and you need to work with a professional, such as an accountant or business broker, to understand the tax implication of any decision you make.
3. What are the Interest Rates?
The third factor you want to consider is interest rates. If you get a buyer, what is an acceptable interest rate for a seller financed sale?
4. Are there Additional Costs Involved?
A fourth key question to ask yourself is do you have any unsecured creditors that have not been paid off? Additionally, you’ll also want to determine whether or not the seller plans on paying for a part of the closing costs.
5. Will the Buyer Need to Assume Debt?
Finally, will the buyer need to assume any long-term or secured debt? The issue of long term and/or secured debt is no small issue. Be sure to clarify this important point well in advance. Also keep in mind that favorable terms typically translate to a higher sales price.
Business brokers are experts at buying and selling all kinds of businesses. When it comes time to structure a deal that benefits both the buyer and the seller, business brokers can prove to be invaluable. At the end of the day, working with a business broker is one of the single biggest steps you can take to ensure that your business is sold and sold as quickly as possible.
Obtaining a Fair Market Value for Your Business
Divestopedia published a rather insightful article, “Letting the Market Bridge the Valuation Gap.” In this October 2018 article, Dave Kauppi dives in and explores how fair market value can be used as a way for business owners to “bridge the gap between the valuation they feel they deserve and that which they’re likely to receive.” This, of course, increases the chances of a deal actually taking place. Let’s turn our attention to some of the key points in Kauppi’s informative article.
Understanding the Reality of Selling a Business
One key point is that only a low percentage of businesses actually sell on their first attempt. The article points out that a mere 10% of businesses that are for sale are actually sold three years later; this is a simply brutal fact. Few facts, if any, help underscore the value of working with a business broker more than this point. Selling a business can be difficult under even the best of circumstances. The process is complex, and most sellers have never actually sold a business before.
Divestopedia believes that it is critical for business owners to have realistic expectations regarding valuation. As the article points out, the market doesn’t care “how much money you need for retirement,” or how much you’ve invested.
Four Points to Consider
According to the article, it is important that business owners understand that a few business characteristics will ultimately drive the sale. There are four key factors to consider: contractually recurring revenue, durable competitive advantage, growth rate and customer concentration.
There is a lot packed into these four points, but here are a couple of big takeaways. In terms of customer growth, if a large percentage of your business is derived from a single customer, then that is going to be seen as a problem. As Divestopedia points out, if your company is dependent and partially dependent on a single customer, then you can expect a lot of pressure for you, as the business owner, to stick around a lot longer to ensure that this key customer isn’t lost. If intellectual property, such as software, is involved, then things can get even more complex. In the end, determining value in technology-based companies can be more challenging.
In the end, working with a seasoned business broker, one that understands valuation and how best to get there, is a must. You want to receive the best possible price for your business. An experienced business broker will help you understand how to navigate the complex process of determining a price. However, and most importantly, a business broker will help you achieve a fair market value, so that your business doesn’t remain unsold for years.
Determining Your Company’s Undocumented Value
Business appraisals are not one-dimensional. In fact, a good business appraisal is one that factors in a wide range of variables in order to achieve an accurate result. Indisputable records ranging from comparables and projections to EBITDA multiples, discount rates and a good deal more are all factored in.
It is important to remember that while an appraiser may feel that he or she has all the information necessary, it is still possible they have overlooked key information. Business appraisers must understand the purpose of their appraisal before beginning the process. All too often appraisers are unaware of important additional factors and considerations that could enhance or even devalue a business’s worth.
There Can Be Unwritten Value
Value isn’t always “black and white.” Instead, many factors can determine value. Prospective buyers may be looking at variables, such as profitability, depth of management and market share, but there can be more that determines value.
Here are some of the factors to consider when determining value: How much market competition is there? Does the business have potential beyond its current niche? Are there a variety of vendors? Does the company have easy access to its target audience? At the end of the day, what is the company’s competitive advantage? Is pricing in line with the demographic served? These are just some of the key questions that you’ll want to consider when evaluating a company.
There are Ways to Increase Both Valuation and Success
No doubt, successful businesses didn’t get that way by accident. A successful business is one that is customer focused and has company-wide values. Brian Tracy’s excellent book, “The 100 Absolutely Unbreakable Laws of Business,” notes that it is critical for businesses to have a company-wide focus on three key pillars: marketing, sales and, of course, revenue generation. Tracy also points out that trends can be seen as the single most vital factor and bottom-line contributor to any company’s success and, ultimately, valuation. For 2018 and beyond, projected trends include an increase in video marketing, the use of crowdfunding as a means of product validation and more.
No Replacement for Understanding Trends
If a company doesn’t understand trends, then it can’t understand both the market as it stands and as it may be tomorrow. Savvy business owners understand today’s trends and strive to capitalize on the mistakes of their competitors while simultaneously learning from their competitors’ successes.
Tracy accurately states that while there are many variables in determining value, finding and retaining the best people is absolutely essential. One of the greatest assets that any company has is, in the end, its people.