03 Apr Around the Web: A Week in Summary
A recent article from the EXIT firm entitled “The Truth about Selling Businesses That They Don’t Tell You” explains the glaring difference between the reality of selling a business and the perceptions about the process that business owners often have.
Some business for sale listing platforms and even some business brokers may make it appear that selling a business will be a breeze. However, the reality is that 80 percent or more of the businesses that are listed never sell; and many of the ones that do, don’t sell for the price that the owner expected. Listed below are some truths regarding the sales process that can better prepare an owner for the adventure that is listing your business for sale:
- Buyers are not going to see your business the same way you do, they will wear grey tinted glasses in comparison to your rose tinted glasses.
- Selling your business is not about knowing or alerting the ‘right’ people to the sale. Your business has to stand up to very thorough scrutiny before receiving an offer which is only the halfway point.
- You may have to lend the buyer money. Financing some or all of your business is a key to making it appealing to many buyers.
- The sales process is not a quick one. Most often inquiries gradually pour in over weeks, months and sometimes years before a business is sold.
- Due diligence can become a full time job. Thorough and detailed paperwork is rarely enough to appease a potential purchaser, and answering the many questions they’re likely to have can be very time consuming.
- Fees can add up quickly. During this process you may need the services of an accountant or tax professional, a lawyer and other advisors. All of whom will have their own set of fees associated with their services.
- The value of your business according to a valuation and the value of your business according to a buyer are likely to be two very different numbers.
A recent article from Divestopedia entitled “What’s Missing in EBITDA?” discusses the components that make up EBITDA, and what critical factors are missing from this calculation to derive an accurate multiple.
Currently, EBITDA is the standard for generating a multiple. A multiple of EBITDA is commonly used to determine the approximate worth of a company because it normalizes earnings and is a quick, easy way to compare companies across an industry. However, great businessmen such as Warren Buffet and Charlie Munger avidly denounce the reliability of EBITDA. Even though it is a very popular standard in the M&A market today, the calculation overlooks a couple of critical factors that contribute to the value (or lack thereof) of a business post-sale, such as:
- Tenant Improvements
- Working Capital
Both multiples and EBITDA can be misleading figures when approximating the cash flow or value of a business. It’s important to understand and factor in the figures mentioned above, and as always consult a professional if there’s anything you’re not sure of or struggling to understand.
A recent blog post from BusinessBroker.net entitled “First Time Buyer Processes” explains in detail the steps involved with purchasing a business for the first time business buyer.
There are many reasons to buy a business, but if it’s your first time approaching the topic, it can seem a little overwhelming. To help you understand the process and reduce any overwhelm, the steps for purchasing a business are laid out below:
- Research and evaluate the different types of businesses available and choose one that you will enjoy and like.
- Once you’ve found a type of business you’re interested in, meet with multiple business brokers and choose one to work with that makes you feel comfortable.
- Find a business listing that piques your interest and fill out a confidentiality form to receive more detailed information on the business. If you’re still interested in the business, set up a meeting with the owner and prepare a list of questions you have regarding anything but the sale price.
- Based on the information provided to you by the broker and the seller consult a business attorney and a business accountant to assist you in evaluating the business in further detail.
- Make a written offer to the buyer, including contingencies that allow you to confirm any information you’ve been provided thus far.
- Once the offer is agreed upon, proceed with your due diligence. Thoroughly inspect the financials, facilities and equipment, and anything you need to in order to confirm that the business in question is worth your investment. Your business broker can provide you with a list of things to cover during this stage of the deal.
- If everything checks out and you and the seller are in agreement on all accounts, have documents prepared by an escrow attorney, close the transaction and begin your training with the previous owner.
The process for purchasing a business is a lengthy one out of necessity. It’s designed to protect the best interests of both the buyer and the seller. Working with a business broker who is well versed in this process is a powerful tool in protecting yourself and navigating the lengthy, in-depth process that precedes achieving your dreams of becoming your own boss.