Business brokers and other professional intermediaries use business valuation rules of thumb to help sellers price their businesses for sale. These "rules" are very useful for appraising nearly every small business, however they are gross simplifications and should only provide a general idea of a suitable price range for a particular business.
If a rule of thumb is used to value a business, some type of earnings multiplier makes the most sense to prospective buyers. It directly addresses the buyer's motive to make money to achieve a return on investment. Sales multiples mean nothing unless they can be translated into earnings.
Two areas of confusion are inappropriate comparisons to investment real estate or to stock market earnings multiples. Real estate is often priced at 8 to 10 times its net operating income. Stock market prices are often as much as, or even more than, 20 times earnings. These two comparisons do not work for small businesses primarily because the risk of owning a small, closely-held, privately owned business is thought to be much higher than owning either real estate or publicly held stock. A business has lower liquidity than real estate and stock, and running a small business is also a lot tougher than managing an office building or a stock portfolio.
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Thursday, March 04, 2010
Tuesday, April 07, 2009
Buying An Existing Business Part IX of IX
Tips and Definitions
This final part is devoted to some business definitions, some business tricks and overcoming the usual arguments of buying am existing small business.
The Usual Suspects:
1. "Starting a business from scratch is less expensive than buying an existing business."
This is most common argument. I personally have started several business and purchased several business. My believe is that in the long run I spent more time and money on the startups.
Consider just the cost of advertising to bring a startup to the same level of income as an existing business.
Add to this the time you must spend, not to mention the loss of earnings, setting up vendors, finding a location, negotiating a lease, hiring and training employees.
This is just the beginning of the hundreds of details you will need to tend to that are already in place with an existing business.
2. "Very few sellers sell a successful business."
Folks this is just not true. Business are sold all the time for a variety of reasons. Many are sold for poor health. retirement, death, burn-out and partnership breakup. You, the buyer, must just look carefully at the reasons for the sale. Don't take anyone's word.
3. "Seller may become a competitor"
Solution: Get a covenant not to compete. Non-competitive covenants are designed to prevent sellers from participating in a competitive business for a period of time and within a radius of specified miles.
These are the three major concerns. There are other arguments that will be discussed at length in a future report.
A Few Definitions
"Adjusted Operating Income (AOI)" -- Used in a cash-flow valuation and recasting of profit and loss statements.
"Confidentiality Agreement" -- The promise that you'll use the information only to make a decision about buying said business.
"Due Diligence" -- The due diligence is the time when you’ll have access to the company’s books and records.
"Existing" -- For purposes of this ebook we define "existing" as a business that is up and running, offers a product and/or service, has a physical location, and financial records.
"Goodwill" -- An intangible asset which provides a competitive advantage, such as a strong brand, reputation, or high employee morale. In an acquisition, goodwill appears on the balance sheet of the acquirer in the amount by which the purchase price exceeds the net tangible assets of the acquired company.
"Letter Of Intent" -- A business purchase letter of intent is really a non-binding agreement that says "I would like to buy your business for an asking price of $xxxx, but first I want to take a closer look at your business".
"Seller's Discretionary Cash (SDC)" -- Profit and loss line items added to the bottom line. Used in a cash-flow valuation.
"Small Businesses"-- Rather than define "Small Businesses" based on annual sales, number of employees, or other quantitative measures, Let's define a small business as one with only one level of management, namely you, the owner. This definition may not be perfect but for purposes of our discussion it better sums up what most small businesses really are.
Conclusion
My advise when buying a any business is to be cynical and pessimistic. Accept nothing on faith. Look for trouble before it finds you.
For more information
GO HERE
DISCLAIMER: The purpose of the information contained within this Blog is to provide general guidelines for various subjects of interest. Your use of this information is at your own risk. Each user of this Blog should consult a qualified professional who understands the user's particular factual situation before making decisions, and PRO-BIZ marketing, LLC makes no express or implied representations or warranties. PRO-BIZ marketing, LLC does not guarantee the completeness, accuracy or timeliness of this informationa
This final part is devoted to some business definitions, some business tricks and overcoming the usual arguments of buying am existing small business.
The Usual Suspects:
1. "Starting a business from scratch is less expensive than buying an existing business."
This is most common argument. I personally have started several business and purchased several business. My believe is that in the long run I spent more time and money on the startups.
Consider just the cost of advertising to bring a startup to the same level of income as an existing business.
Add to this the time you must spend, not to mention the loss of earnings, setting up vendors, finding a location, negotiating a lease, hiring and training employees.
This is just the beginning of the hundreds of details you will need to tend to that are already in place with an existing business.
2. "Very few sellers sell a successful business."
Folks this is just not true. Business are sold all the time for a variety of reasons. Many are sold for poor health. retirement, death, burn-out and partnership breakup. You, the buyer, must just look carefully at the reasons for the sale. Don't take anyone's word.
3. "Seller may become a competitor"
Solution: Get a covenant not to compete. Non-competitive covenants are designed to prevent sellers from participating in a competitive business for a period of time and within a radius of specified miles.
These are the three major concerns. There are other arguments that will be discussed at length in a future report.
A Few Definitions
"Adjusted Operating Income (AOI)" -- Used in a cash-flow valuation and recasting of profit and loss statements.
"Confidentiality Agreement" -- The promise that you'll use the information only to make a decision about buying said business.
"Due Diligence" -- The due diligence is the time when you’ll have access to the company’s books and records.
"Existing" -- For purposes of this ebook we define "existing" as a business that is up and running, offers a product and/or service, has a physical location, and financial records.
"Goodwill" -- An intangible asset which provides a competitive advantage, such as a strong brand, reputation, or high employee morale. In an acquisition, goodwill appears on the balance sheet of the acquirer in the amount by which the purchase price exceeds the net tangible assets of the acquired company.
"Letter Of Intent" -- A business purchase letter of intent is really a non-binding agreement that says "I would like to buy your business for an asking price of $xxxx, but first I want to take a closer look at your business".
"Seller's Discretionary Cash (SDC)" -- Profit and loss line items added to the bottom line. Used in a cash-flow valuation.
"Small Businesses"-- Rather than define "Small Businesses" based on annual sales, number of employees, or other quantitative measures, Let's define a small business as one with only one level of management, namely you, the owner. This definition may not be perfect but for purposes of our discussion it better sums up what most small businesses really are.
Conclusion
My advise when buying a any business is to be cynical and pessimistic. Accept nothing on faith. Look for trouble before it finds you.
For more information
GO HERE
DISCLAIMER: The purpose of the information contained within this Blog is to provide general guidelines for various subjects of interest. Your use of this information is at your own risk. Each user of this Blog should consult a qualified professional who understands the user's particular factual situation before making decisions, and PRO-BIZ marketing, LLC makes no express or implied representations or warranties. PRO-BIZ marketing, LLC does not guarantee the completeness, accuracy or timeliness of this informationa
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