130 Allens Creek Rd., Ste. 117, Rochester, NY 14618

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E-mail: info@klasseningalls.com

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Owned Real Estate and Selling Your Business

Real EstateBusiness owners wishing to sell their business often own the real estate occupied by the business. It is important to drive value where it belongs. In general, the real estate is valued based on the income it produces. If the rent paid by the business is below market, then in all likelihood, the real estate will be undervalued and the business will be overvalued due to the resultant inflated profits. When pricing your business for sale, insure that underlying financial performance includes a market based rental rate. If you retain the property after the business is sold, make sure the lease is based on market rate rents.

Real estate brokers and business brokers have two very different sets of skills, utilize different marketing techniques, and work in very different pools of prospective buyers. Using one type of broker to sell both types of assets may not be your best alternative. If the business is highly dependent on that specific piece of real estate, one broker may work. Think about what will drive the transaction and hire the right broker. Will the real estate buyer want to own the business or will the business buyer need to own the real estate?

Selling Your Business Requires Preparation

sellingbusinessUnderstanding what makes your business attractive to buyers is the first step in preparing for an eventual sale.  Below is a list of items that are generally found to be the most important:
- Recurring Revenue/Strong Cash Flow
- Consistent Growth
- Transparent Financial Management and Reporting
- Tangible and Intangible Assets
- Talented Work Force and Management Team
- Diverse Customer Base
- Rock Solid Infrastructure/Processes
- Strong Competitive Position/Barriers to Entry
- Systemic/Repeatable Sales Process 
Achieving success in as many of these areas as possible will create an operation that delivers improved results that can be sustained over time.  Your business will be more "sellable". 
An opportunity to sell your business may present itself when you least expect it. You may get an inquiry from an interested buyer or from an intermediary.  You may recognize an emerging marketplace dynamic that suggests now is the time to sell.  Put yourself in a position to make the most of these opportunities when they arise.

Market Conditions for Small Businesses Being Sold

business-for-saleThe following are highlights from a recently published quarterly MarketPulse from the The International Business Broker Association for Main Street businesses (up to $2 million in market value) and Lower Middle Market transactions ($2-50 million in market value).

REASON FOR SELLING: Baby boomers are beginning to exit their businesses in larger numbers than in the previous five years. Retirement was the number one  reason driving business sales in virtually every segment.  For businesses valued at less than $500 thousand, the number one reason for selling was owner "burn out".

SUPPLY/DEMAND: For businesses smaller than $500 thousand, supply slightly outweighs buyer demand; for businesses in the $500 thousand to $5 million range, supply and demand seem to be balanced; and for businesses in the $5 million to $50 million range, the current market tends to favor the seller.

BUYER TYPE: Existing companies continue to be the lead buyers for businesses with a market value greater than $500 thousand, followed closely by previous business owners.  Individuals continue to lead activity in the less than $500 thousand category.  

TIME TO SELL/CLOSE: In general, expect a cycle time of 6-12 months.  Smaller businesses (<$500 thousand) trend toward the lower end of the range.

HOT INDUSTRIES: Personal services, business services and retail have seen the most activity at the low end of the market. Manufacturing businesses continue to drive the largest portion of activity in the $2 million to $5 million range, followed by consumer goods/retail and wholesale distribution.  Manufacturing was also the primary activity driver in the $5 million plus segment, followed by healthcare.

MULTIPLES: The typical selling multiples for healthy businesses up to $2 million are 2.0-3.0 times Sellers Discretionary Earnings, for businesses in the $2 - $5 million range, 4.0 times EBITDA and for companies in the $5 million to $50 million range, 4-8 times EBITDA. For businesses that are inventory dependent, the value of the inventory is typically additive to the valuation driven by a multiple.

DEAL STRUCTURE: Deal structures continues to consist of buyer equity, senior debt and seller financing. The portion of seller financing tends to decrease as deals get larger but remains an important element, as even strategic buyers want to insure that sellers are committed to the future success of the business.

What Is Your Business Worth?

businessworthIf you are considering selling your business, you should be asking a different question - "What should my asking price be?"  Determining an initial asking price is not an exact science. The asking price is simply a starting point but it has to be compelling enough to attract interest from potential buyers. At the end of the day, the terms of the deal are as important as the price. 

If your business is generating more than a million dollars in annual revenues, consider having a formal valuation done by a certified valuation professional.  It will help you determine an asking price and it will provide insight as to what is driving the value of your business. This information can help you to improve your business operations, financial results and enterprise value.

For many small businesses, a multiple of the Seller's Discretionary Earnings (SDE) will generally provide sufficient insight to set an asking price.  Determining SDE is an analytical exercise that starts with the P/(L) of a business and restates the income to reflect the true owner's income/benefit from the business. The restatement involves adding back items like owner's salary, other owner perks, non-cash expenses, non-recurring items as well as making market based adjustments for a variety of items.  Applying a multiple is a bit of an art form.  Insight into the sales of comparable businesses will provide a range of multiples - where your business falls in that range depends on its health and competitive position as well as the industry.

For businesses with little or no income/cash flow, a valuation will generally reflect the value of both the tangible and intangible assets.

It's A Great Time To Buy A Business!

buyabusinessToday's improving economic conditions have produced an environment that is conducive to buying a small business. Whether your're inclined to buy a challenged business and fix it, or buy a strong business and grow it, a lot of things are working in your favor.

First of all, the financing landscape is pretty good.  Both small and large banks are lending using both conventional loan products and SBA products,  non- traditional lenders are offering compelling products at interest rates that are higher than the banks but still very low from a historical perspective, and sellers continue to provide financing at attractive terms. Secondly, many business are experiencing improving trends that can benefit a buyer. These factors contribute to an improving financing environment - some would say it is robust.

Most business sale transactions are completed based on a mix of the following:  1)  buyer cash, 2) traditional bank financing, 3) non-traditional financing, and/or 4) seller note. Creativity and terms are as important (sometimes more important) as price. Listen closely to what is important to a seller.  Invariably, there is a gap between what a buyer will pay and what a seller will accept, and a creative solution may be the answer.  For example, maybe the buyer could fund an insurance policy for the seller, provide an employment/consulting opportunity, or pay for a personal vehicle for the seller.  

The point is - if you're interested in buying a business, now is a good time to pursue your passion!