Selling or buying a business is a process that is consistent, orderly and logical. Regardless of the size or type of the business, the steps remain the same. And much like the adage about the lawyer who represents himself has a fool for client, trying to rush through the process without a professional to help guide you is a recipe for disaster.
First, you got to get into the game. Just like in basketball, where you have to have skills such as dribbling, passing and shooting if you want to be successful, you need skills when selling or buying a business to maximize your return. Let’s talk about those skills.
It is important to think with your brain and not your heart. You must put your feelings aside to get an accurate and realistic value of the business. You are going to have to analyze the business, not only by what is called multiples( of either revenue or cash flow), but also take into account similar types of business that may have been bought or sold recently in the area. These are referred to as “comps”. Is the lease long enough? Is the rent too high for the business to succeed? How is the industry “trending? Do you begin to realize how important the right professional broker is about now?
Let’s go back to our basketball analogy. No matter how gifted athletically a player is, without proper training and a proper plan, the team is doomed to fail. Understand that the broker is like a highly skilled coach, not only there to give you all the basics you need, but also a cohesive strategy in real time to accomplish your goals.
The first step is to make sure to prepare all the financial statements you will need. Owner should have these statements going back three years, including an income statement, a cash flow statement and a balance sheet. If the business is newer than three years, collect information from start-up until present time. Now would be the time to transform the income statements into what is called an SDE, which ill take into account non-recurring purchases and discretionary expenses to help reflect the value of the business. It’s now time to really look at the business and determine a realistic numerical value. We look at the tangible assets of the business , such as inventory, equipment and fixtures. Next come the intangible assets, comprised of intellectual property, contracts, branding, partnerships and more. Again, this can be a bit tricky and a good broker is worth his/her weight in gold during this phase.
Perhaps the most vital step in determining a real value of the business is finding the correct multiple to work with. Multiples vary from business to business, area to area, and can be affected by a multitude of other factors. Multiples are exactly what they sound like, they are a multiple of usually either annual cash flow(net earnings) or revenue (gross income) entering the business. They establish not only what the bottom line has been for current owner, but also what new buyer can expect to earn on investment.
Next comes the offer and the back and forth negotiating. If the process has been followed correctly, if all the financials are in order, if everything that has been stated is validated, the parties will go to contract and the sale will proceed.
So there you have it. And maybe you are still thinking, “I can do this myself.” And maybe you can. But things NEVER, NEVER proceed without a hitch. But what if your business was worth more than the valuation you come up with. What could you have done to have immediately added more value(both real and perceived)? Are you leaving money on the table, money that you worked hard for all this time? Has someone expressed interest in your business? Are they viable or just “tire kickers”? Do you really want to divulge confidential financial information to someone not properly vetted?
How about you, business buyer? You’ve found a business that looks good, and you want to go for it. Do you know if a national competitor is coming down the block, or that the property has been on the market forever because the lease is unfavorable? Have all health and safety issues been met or resolved?
So pay attention to the aforementioned adage about the lawyer who represents himself being a fool, and work with a professional to avoid any unforeseen snags and issues to make sure your dreams, and not a nightmare comes true in an organized and seamless transaction.