Three Basic Factors of Earnings

Two businesses for sale could report the same numeric value for "earnings" and yet be far from equal. Three factors of earnings are listed below that tell more about the earnings than just the number. 1. Quality of earnings Quality of earnings measures whether the earnings are padded with a lot of “add backs” or one-time events, such as a sale of real estate, resulting in an earnings figure which does not accurately reflect the true earning power of the company’s operations. It is not unusual for companies to have “some” non-recurring expenses every year, whether for a new roof on the plant, a hefty lawsuit, a write-down of inventory, etc. Beware of the business appraiser that restructures the earnings without “any” allowances for extraordinary items. 2. Sustainability of earnings after the acquisition The key question a buyer often considers is whether he or she is acquiring a company at the apex of its business cycle or if the earnings will continue to grow at the previous … [Read more...]

A Listing Agreement is More than Just a Piece of Paper

In order to sell one’s business using the services of a business broker, a listing agreement is almost always required. For the owner of the business, signing the agreement legally authorizes the sale of the business. This simple act of signing represents the end of ownership. For some business owners, it means heading into uncharted territory after the business is sold. For many it also signifies the end of a dream. The business owner may have started the business from scratch and/or taken it to the next level. A little of the business owner may always be in that business. The business, in many cases, has been like a part of the family. For buyers, the signed listing agreement is the beginning of a dream, an opportunity for independence and the start of business ownership. The buyer looks at the business as the next phase in his or her life. Pride of ownership builds. So, that simple piece of paper – the listing agreement – is the bridge for both the seller and the buyer. The … [Read more...]

What a Buyer May Really Be Looking At

Buyers, as part of their due diligence, usually employ accountants to check the numbers and attorneys to both look at legal issues and draft or review documents. Buyers may also bring in other professionals to look at the business’ operations. The prudent buyer is also looking behind the scenes to make sure there are not any “skeletons in the closet.” It makes sense for a seller to be just as prudent. Knowing what the prudent buyer may be checking can be a big help. A business intermediary professional is a good person to help a seller look at these issues. They are very familiar with what buyers are looking for when considering a company to purchase. Here are some examples of things that a prudent buyer will be checking: Finance Is the business taking all of the trade discounts available or is it late in paying its bills? This could indicate poor cash management policies. Checking the gross margins for the past several years might indicate a lack of control, price erosion or … [Read more...]

What is the Value of Your Business? It All Depends.

The initial response to the question in the title really should be: “Why do you want to know the value of your business?” This response is not intended to be flippant, but is a question that really needs to be answered. Does an owner need to know for estate purposes? Does the bank want to know for lending purposes? Is the owner entertaining bringing in a partner or partners? Is the owner thinking of selling? Is a divorce or partnership dispute occurring? Is a valuation needed for a buy-sell agreement? There are many other reasons why knowing the value of the business may be important. Valuing a business can be dependent on why there is a need for it, since there are almost as many different definitions of valuation as there are reasons to obtain one. For example, in a divorce or partnership breakup, each side has a vested interest in the value of the business. If the husband is the owner, he wants as low a value as possible, while his spouse wants the highest value. Likewise, … [Read more...]

A “Pig in a Poke”

Once a buyer has negotiated a deal and secured the necessary financing, he or she is ready for the due diligence phase of the sale. The serious buyer will have retained an accounting firm to verify inventory, accounts receivable and payables; and retained a law firm to deal with the legalities of the sale. What’s left for the buyer to do is to make sure that there are no “skeletons in the closet,” so he or she is not buying the proverbial “pig in a poke.” The four main areas of concern are: business' finances, management, buyer's finances, and marketing. Buyers are usually at a disadvantage as they may not know the real reason the business is for sale. This is especially true for buyers purchasing a business in an industry they are not familiar with. The seller, because of his or her experience in a specific industry, has probably developed a “sixth sense” of when the business has peaked or is “heading south.” The buyer has to perform the due diligence necessary to smoke out the real … [Read more...]

Creating Value in Privately Held Companies

“As shocking as it may sound, I believe that most owners of middle market private companies do not really know the value of their company and what it takes to create greater value in their company … Oh sure, the owner tracks sales and earnings on a regular basis, but there is much more to creating company value than just sales and earnings”      Russ Robb, Editor, M&A Today Creating value in the privately held company makes sense whether the owner is considering selling the business, plans on continuing to operate the business, or hopes to have the company remain in the family.  (It is interesting to note that, of the businesses held within the family, only about 30 percent survive the second generation, 11 percent survive the third generation and only 3 percent survive the fourth generation and beyond). Building value in a company should focus on the following six components: the industry the management products or services customers competitors comparative … [Read more...]

What Do Buyers Really Want to Know?

Before answering the question, it makes sense to first ask why people want to be in business for themselves. What are their motives? There have been many surveys addressing this question. The words may be different, but the idea behind them and the order in which they are listed are almost always the same. Want to do their own thing; to control their own destiny, so to speak. Do not want to work for anyone else. Want to make better use of their skills and abilities. Want to make money. These surveys indicate that by far the biggest reason people want to be in business for themselves is to be their own boss. The first three reasons listed revolve around this theme. Some may be frustrated in their current job or position. Others may not like their current boss or employer, while still others feel that their abilities are not being used properly or sufficiently. The important item to note is that money is reason number four. Although making money is certainly important and … [Read more...]

Questions to Consider for the Serious Buyer

A serious buyer should have the answers to the following questions: Why are you considering the purchase of a business at this time? What is your time frame to find a suitable business? Are you open-minded about different opportunities, or are you looking for a specific business? Have you set aside an amount of capital that you are willing to invest? Do you really want to be in business for yourself? Are you currently employed or unemployed? Are you the decision maker, or are there others involved? The real key to being a serious buyer, however, is whether the individual can make that “leap of faith” so necessary to the purchase of a business. No matter how much due diligence a buyer performs, no matter how many advisors there are to advise the buyer, at some point, the buyer has to make a leap of faith to purchase the business. There are no “sure things” and there are no guarantees. If a buyer is not comfortable being in business, he or she should not even contemplate buying … [Read more...]

What Would Your Business Sell For?

There is the old anecdote about the immigrant who opened his own business in the United States. Like many small business owners, he had his own bookkeeping system. He kept his accounts payable in a cigar box on the left side of his cash register, his daily receipts – cash and credit card receipts – in the cash register, and his invoices and paid bills in a cigar box on the right side of his cash register. … [Read more...]

Burnout: An Ever-Present Threat

Burnout is an often-used reason for an owner selling his or her business. Potential buyers may have trouble accepting this as a valid reason for sale. However, burnout is a valid reason for selling one’s business. … [Read more...]