1.
I have been asked......
”Why
is confidentiality important?”
Confidentiality is very important
during a sale or merger process to maintain current employees and
customers. Trained
employees and a loyal customer base are valuable assets of any
business. Most
people do not like change, unless they initiate the change. If an
employee or
customer is expecting an ownership change, then they may be the first
to make a
move to another company.
Suppliers and
competitors do not make
good purchase candidates. They have been known to tell other
competitors and established
customers about contemplated transition intentions. This will NOT help
the business
value while locating a purchase prospect.
A professional
business intermediary
will be able to design an encompassing confidential marketing plan for
transition of your client’s business or practice while protecting the
value.
2.
I have been asked......
”What
is an Asset Business Sale?”
An “Asset Business Sale” is the sale of
certain assets of a Business entity or Corporation. It is not the
sale
of the entire Business or the sale of Corporate Stock.
An “Asset Business Sale” will typically
include Inventory and Equipment as the only tangible balance sheet
items
included in the sale. Intangible assets sold may include Goodwill,
Non-compete
agreements, and Consulting agreements.
Balance sheet asset items typically
retained by the selling enterprise include cash, accounts receivable,
deposits,
and prepaid items. All liabilities will remain with the selling
Business. Any debt related to assets sold
would be paid
at closing and transferred with clear title to the purchaser.
The distinction between an asset
business sale and an equity business sale becomes magnified when
applying a
“rule of thumb” to estimate a sale price. It is important to know from
which
type of sale the “rule of thumb” was derived to be applied correctly.
Breckenridge
Business consultants will know the difference for the sale or merger of
a
business. Your tax accountant and attorney will know how the difference
would affect
you personally.
3.
I have been asked.....
“How does a Business Broker
estimate the Asking Price for a small business?”
The
Business Broker will estimate the “Asset Sales Price” of a business by
a
combination of sold price multiples that are the result of similar type
and
size of businesses actually sold. Business
Brokers will have access to price
multiple ratios from broker
associations, as well as, paid subscription web sites. These files will
have
sold price multiples for thousands of small businesses. The multiples
are usually
a ratio of sold price to revenue and of sold price to owner
discretionary
earnings. (Not EBDIT or Net Income) Revenue is simply the annual gross
sales of
the business. Owner’s discretionary
earnings is business net income plus the owner salary, owner
perks
(auto, insurance, etc.), depreciation
/ amortization and
business interest paid.
The
ratios/multiples are the result of averages, the average sold price of
an
average business. Both ratios/multiples should be calculated for the
selling
business. A business with high revenue and no (or low) owner’s
discretionary
earnings may have little value.
EXAMPLE
Revenue $
300K
to $500K
Sold Price / Revenue
Sold Price /
Owner’ Disc. Earn.
Ice
Cream/Yogurt store
.63
2.3
Book store
.43
1.8
ESTIMATE
Ice
Cream/Yogurt store
Revenue
of $400K x .63 = $252,000
Disc.
Earn of $100K x 2.3 = $230,000
Book
store
Revenue
of $400K x .43 =
$172,000
Disc.
Earn of $100K x 1.8 = $180,000
This
seems to indicate that the Ice Cream store is earning less than average
and the
Book store is earning more than average. The Broker would estimate an
Asking Price
based on judgment from the above method. There is no exact formula that
will
give the correct Asking Price every time. The
ratio formulas are only a guide for a
knowledgeable, experienced
Business Broker’s judgment.
The
Business Broker estimate of an “Asset Sale Price” is not an appraisal of the
business. A business
appraisal is generally based on market, asset, and earnings approaches
to
value. An appraisal will estimate value for the entire business entity
or a
divided interest.
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