San Francisco Bay Area :: Business Sales, Valuations, and Advisory Services for Privately Held Companies

Business Owners decide to sell for a variety of reasons. Some of the primary reasons include:

• The Owner is retiring
• There are health issues
• There are partnership disputes
• The Owner may have family members who are relocating
• The Owner is tired or "burned about"
• The Owner can't handle the business

While it is difficult to find great business for sale, the simple fact that is for sale does not automatically indicate that there is a problem. ABI has sold hundreds of fantastic businesses over the years.

The value of a business depends on the needs and perspectives of each individual Buyer. Value is related to risk and the ability of the business to generate and income stream that is comfortable for the Buyer.

Start with the basics:

• Review the tangible assets (FF&E)
• Recast (or normalize), confirm, and review Sellers Discretionary Earnings (SDE)
• Review factors that can impact future earnings
• Review valuation approaches with your ABI Intermediary
• Perform an investment analysis to determine net cash flow after debt service

There are three basic valuation methods:

1. Asset Approach: Fair Market Value of the assets of the business
2. Income Approach: A multiple of earnings based on Sellers Discretionary Earnings
3. Market Approach: Commonly referred to as Comparable Sales Approach. Historically, what have similar type businesses sold for?

In many cases there are some common averages:

• Two to Four times annual Sellers Discretionary Earnings
• Fair Market Value (FMV) of Furniture, Fixtures, and Equipment (FF&E) and inventory plus one year's Seller's Discretionary Earnings

A one-size-fits-all valuation method does not exist. Each business will be valued differently because each business (and every Buyer) is so different. Further, different appraisers will often come up with a wide range of values for the same opportunity. Value is definitely in the eye of the beholder.

Regardless, the final price must make financial sense:

• Must cover debt service
• Must provide a reasonable income for the Buyer
• Must provide a reasonable Return on Investment (ROI) for the Buyer
• Must allow for working capital fluctuations

While ABI assists the Seller in finding the best method to price a business, the final price and terms is determined by the Seller. Conversely, while ABI assists the Buyer in calculating a range of values for a business, the offer amount rests solely with the Buyer.

When a house goes on the market, most people add something to the price for negotiating purposes. Buyers and Sellers expect this. It sometimes takes several rounds of negotiations to finally agree on the final price and terms. And, if the transaction is not completed, it is not the end of the world-there are plenty of other houses on the market.

It is not the same with the sale of a business. The supply of businesses for sale is limited. If the price and terms of a business are reasonable according to accepted valuation formulas, bargaining only for the sake of bargaining is counterproductive. The cost of a lost opportunity, lost time, and lost effort may not outweigh the benefits of a slightly lower price. If you have reached the point where you are prepared to make an offer, you must have already decided that you want the business. This business will be providing your income stream for many years-is it worth losing the business over a few dollars?

An Asset Purchase Agreement specifies Price, Terms, and Payment:

• Cash due at closing
• Seller financing terms-term, interest, security
• Third-Party financing terms
• Non-compete terms
• Training period

The Asset Purchase Agreement is always subject to certain contingencies that are satisfied prior to opening escrow:

• Financial due diligence
• Review of Seller's Disclosure Statement
• Financing arrangements (if necessary)
• Lease assignment or the making of a new lease
• Licensing requirements
• Franchise approval

Other issues to be addressed include:

• Allocation of Purchase Price
• Desired Closing Date
• Date when Seller must respond
• Earnest money

Once an offer is written, ABI will present it to the Seller. The Seller then has three options:

• Accept the offer as presented
• Respond with the Counter-Offer
• Let the offer expire with no action (rejection)

Definition: Pretax net profit, plus non-cash expenses, discretionary expenses, costs of financing, one-time expenses, and all compensation paid to a single owner/operator, less employee equivalent compensation to replace additional working owners and any known increases in fixed expenses.

The taxable income shown on the tax return is not representative of the earning power of the business, but rather represents the best efforts of the business owner and his accountant to minimize the taxes that the business owner is required to pay.

SDE is the benchmark for earnings of owner/operator businesses used by business brokers, appraisers, Buyers and Sellers. Comparable sale data uses SDE in the Price/Earnings Ratio (Sale price of business divided by the SDE). Brokers recast income statements using standard methodology. This enables consistency in comparing small businesses and calculating values for buying and selling them.

Sellers are very concerned about confidentiality because of:

• Fear of losing customers
• Fear of losing employees
• Actions by competitors
• General disruption caused by uncertainty

Therefore, as a potential Buyer, you must treat confidentiality seriously.

Buyers should NOT:

• Talk to employees, clients, suppliers, or competitors without written approval from the Seller.
• Disclose the fact that the business is for sale except with professional advisors.
• Make direct contact with the Seller without an ABI representative.

Maintaining confidentiality is also advantageous to the Buyer because a smooth transition without problems is good for business!

ABI will also maintain Buyer confidentiality and will not disclose to anyone that the Buyer is trying to make an acquisition. However, the Buyer's identity must always be disclosed to the Seller in order to receive information on the business.

1. There are NO perfect businesses-don't expect to find one.
2. If you have even a little interest in a business after reviewing the provided information, have ABI schedule a tour and meet the Seller. If you find a business you like, make an offer-do not wait too long or the opportunity may pass you by.
3. Ask ABI any and all questions.
4. Picture yourself as the owner of the business-what would you do to improve the business?
5. If you have never owned a business, consider a service or distribution type operation. Manufacturing or technical businesses have a much longer learning curve.
6. Absentee businesses are nonexistent. Almost all businesses require some owner involvement on a daily basis. However, many businesses can be run semi-absentee with good success.
7. Make sure your acquisition criteria are realistic and that you have sufficient cash to invest in the business you desire.
8. Maintain back-up reserves-lack of capital is the primary reason businesses fail.