Selling a business is always complicated. Considering what I am about to tell you will make it easier to understand.

I’ve been selling businesses full-time for nearly 30 years. I don’t believe I need to be modest.

I know how it GETS done. I know how you WANT it done. I know how it SHOULD BE done.

Understanding those three aspects of the process, and bringing them into alignment, is the key to making it all work.

In this series of five blogs/podcasts, I will be discussing all of the major issues involved in selling a business.

I have chosen to write it in five parts:

Ø      Part 1. Today’s Market

Ø      Part 2. Basic Steps of Selling A Business

Ø      Part 3. Questions to Ask a Business Broker

Ø      Part 4. Surprises You Might Expect

Ø      Part 5. After the Sale

Today’s blog/podcast will be my comments on the market today. Although my comments could be thought to be relevant only to the U.S. market and unique to Maine, I don’t really think that our market is all that different from many others, even in other countries.

Today’s Market:
Time to Get Going!

I am a student of historical trends and I believe today is the most interesting time in all of human history. Because of a unique alignment of causal effects, it is obviously a great time to buy or start a business.

But, I also think it happens, oddly, to be a good time to sell as well. In both cases, it is time to get going.

I never thought that buying and selling could both be favored at the same time, but I believe that is exactly what is true right now.

Uncertainty creates opportunity. Times like these create tomorrow’s business legends. We are right in the midst of the changes that will be tomorrow’s “best thing that ever happened to us.”

It is unlike any previous time because:

      1) Generational shifts are changing the way businesses work,

      2) Recession is causing a worldwide power structure re-mix, and

      3) Scientific breakthroughs are revolutionizing life as we know it.

How does this play itself out?

A business owner in Maine, (we’ll call him John) sells his business because he has a unique opportunity to move and start a whole new life that he didn’t expect.

His business is bought by a young couple who have been traveling overseas for several years.

The whole thing is financed without a bank or SBA guaranty, by a group of third party investors, with a strong down payment from the buyer, and with the help of seller financing that will actually save John taxes.

John’s oldest daughter, with two young children, is a successful executive in a biogenetics firm, is now a millionaire, and is buying mom and dad a separate home near her beachfront coastal home. John is relieved. He will now be free of worry about workers or computers he no longer understands.

The young couple buying John’s business is moving back to Maine for safety and family reasons. They know just how to take John’s business to a completely different level by creating a new, interactive, multi-lingual website for selling John’s product and service worldwide to a niche market.

These buyers have found financing through one of their former employers, now involved in a venture capital fund that organizes small investors on the Internet into larger pools of investment capital to buy businesses.

All of this is what I mean by generational shifts and new opportunities fueled by technology. It’s truly a whole new business buying and selling market.

Buyers have always been younger than business sellers, but today, it makes a bigger difference. Generation Xers are now changing how business is done because they have new tools: new analytic tools, new communications tools and new collaborative tools. Playing computer games all those years, it turns out, had the potential of making you an excellent global resource manager. Who knew?

Recession is causing a dip in the prices of some businesses. But, surprise of surprises, even that old, sleepy, stable business in Maine that reliably serves a steady, safe and friendly local community, can look pretty good when compared to the lower investment returns of previously good investments and the new uncertainties of previously chosen lifestyles.

Banks are expected to be back in the business of small business lending soon, but in the meantime, the market is filling the vacuum in most creative ways. Private funds are coming out for the right deals.

Some of those “right deals” are brand new businesses founded on new technologies. But, just as many, are older businesses given new life with new technology. Targeting niche markets has never been easier. If there are as few as just 1,000 people worldwide that want something, that small number of people can be a great business market for someone who sees their unique need. Technology is also creating unique needs.

As the temperature warms and we head into summer, I remember why people buy businesses in Maine: if they do, they get to live here!

Maine is still a great place to buy a business. Maine is as physically, socially, politically and economically safe as anywhere else on earth!

Other places may be shaky, but things still work here. We also have a great lifestyle.

Who wouldn’t want what we have?

Next Blog/Podcast: The Six Steps of Selling A Business

Buying a business is the right thing to do for some people.

In this series of five blogs/podcasts, I am discussing all of the major issues about buying a business, especially in today’s opportunity-filled market. This is part 5.

This blog/podcast is about what you, the individual buyer, might want, what you should expect to get, and how you should go about doing it, if you decide this unique and special “buying-a-business” path is for you.

Those of you who are individual buyer prospects are usually looking for a business that will employ you as owner/operator. Because you are investing your hard earned money, you want to know that it’s worth it. You want to “run your own show,” an unparalleled personal growth experience. In Maine, especially, we buy businesses that improve our lifestyle. In some cases, it’s more than lifestyle—it’s a personal mission! We intend to leave our mark.

Can you reasonably achieve these objectives with a business purchase? Can you do it now, during a recession?

Yes, you can!

In part 1, I discussed the five things most buyers want in a business purchase and the five things they get. In part 2, we examined the resources a business buyer needs, the background he/she needs, and the home front support such a person needs, too. We also mentioned the knowledge, skills, preferences and passions one needs to get this process to work. In part 3, we discussed the five essential questions. In part 4, we touched, once again on valuation and, specifically, on rules of thumb.

Now, it’s time to make an offer, make it contingent on doing your homework, prepare to negotiate, and fast track the process so you can get to a closing on time!

Make A Contingent Offer

It all starts with an offer. Sellers and brokers can’t do much until you, as a buyer prospect, make one.

A “contingent” offer is one that is subject to the completion of some step that has not yet been taken. It allows the buyer making the offer to get out of the transaction if something goes wrong.

Before you complete your investigation of a business, you may be asked to make an offer. This is normal. Sellers can’t be expected to give you absolutely everything until you prove that you are serious. Making a contingent offer is an acceptable way to do that.

A startling fact is that only 2% - yes it’s only 2% - of business buyer prospects ever actually buy a business! Sellers want to limit disclosures to someone who will definitely buy their business. They are looking for proof in the form of a serious contingent offer.

Most offers made to business sellers are contingent upon the buyer’s completion of homework. Buyers need to verify that representations made are accurate. Buyers need to investigate. This process is called “due diligence.”

Buyers also need to make offers contingent on getting financing. Sometimes that just means working on a detailed proposal for seller financing. Other times that means making applications to lenders.

Offers can be made in two basic ways: a “purchase and sale” contract, or a “letter of intent.” To avoid wasted effort on a proposal that might not be accepted, we usually recommend just drafting a “letter of intent.” It is simpler. You can find samples on the Internet, or you can get one from your lawyer.

A letter of intent just spells out the basics: identities of the parties to the agreement, price and terms offered, details of what assets of the business will be acquired, contingencies needed and a timetable for dealing with them, proposals required for training or non-competition, and a deadline for response to the offer.

A letter of intent can often be in a format as simple as a bullet-point term sheet delivered by email. It doesn’t always have to be a formalized document. Some sellers and buyers are quite comfortable dealing with this informally.

Prepare to Negotiate

Offers are usually met with counter offers. There are some things that shouldn’t surprise us. This is one of those things. Don’t fight this process. It is normal.

Just like you, the seller is fearful of making a bad decision! You have that in common. This can be a tense time.

If there is a broker involved, use the broker. Get the advice of the broker. Consider taking any good advice given. Brokers of businesses usually represent the seller, but they also don’t get paid unless there is a meeting of the minds. They want both of you to succeed in putting an agreement together.

Make offers that are reasonable. Make offers you can afford. If you think the seller has overpriced the business, make your case rationally with evidence, not emotion. Decisions are made emotionally, but only after they are rationalized with evidence. If you don’t understand what the business is worth, and aren’t prepared to present the evidence for what you believe, you are not ready to make an offer.

Sellers often respond to well-reasoned proposals. Sellers normally can be expected to compromise a little. But if you want them to compromise more than a little, be prepared to make your case. Then open your mind to their case. That’s what an effective negotiation involves: listening carefully and reasoning out each little point.

This is good practice. When you own a business, you’ll be doing it every day – with vendors, employees, clients, customers, and – yes – even with your own family members.

Fast Track the Process

After your offer has been accepted, you now enter the real period of verification, investigation and financing, the “due diligence” and lender application phase.

The accuracy of everything you’ve been told about the business needs to be verified. Everything else that’s important to your success needs to be investigated. You really need to take a close look at where the money is coming from and where it will be going.

You may need help here. This is usually the time to get legal and financial advice from professionals. Form your team now, unless you are very experienced at this already. Lawyers, accountants and even bankers have lists of what you need to do at this time. You can also find checklists on the Internet.

There are usually two processes that have to be completed simultaneously at this point – the business due diligence and the lending applications. You will take too much time if you do them sequentially, one after the other. Even though it costs money, you won’t be timely unless you proceed down both paths at the same time. Get your facts and financing together in efforts that proceed in tandem.

Arranging the time to go over the business’ accounting records and review them thoroughly takes coordination. Market research, business plan preparation, lease negotiations, equipment condition inspections, license applications, business entity formation for your new company will take you time. The lender may also require appraisals, inspections and credit reports that take time to order, receive, verify and correct if needed.

Get to the Closing On Time

As you form your team – lawyer, accountant, banker and maybe another family member or close advisor – make sure they know your wishes and the date you need to finish the transaction. That’s called a “closing.” It needs to happen on time.

Advisors left alone and undirected to manage their own part are likely to slow the process down, sometimes because they don’t know the urgency, sometimes by intent because they don’t want to be held accountable for advising you to take a risk. You should be your own team captain. Set the agenda clearly.

You are the risk-taker, not them. Give them permission NOT to be negative. But, don’t expect them to be cheerleaders. Attorneys, accountants and bankers make lousy cheerleaders! Their job is to warn you of danger. Your job is to make the business judgment about risk.

I hope this five-part series has been useful.

I would also point my readers, again, to Richard Parker’s BizQuest blog at http://blog.bizquest.com/2009/04/buying-a-business-tips-and-updates.html. He provides many nice tips on buying and selling and I’m happy to link with him.

Buying a business is the right thing to do for some people.

In this series of five blogs/podcasts, I am discussing all of the major issues about buying a business, especially in today’s opportunity-filled market.

When you and the seller finally trust each other enough to tell the truth, then a good deal is possible. You’ll begin to see the real opportunity a successful transaction offers each of you. You will get the business you want and it will likely be a good deal for both of you.

So, you ask, what’s a good deal? What, after all, is the business worth?

In a previous blog/podcast series, we titled, “Appraising A Business in 60 Minutes,” we covered a lot of territory. In fact, on our website, there are several articles – past and present – that we offer in this category that will be subjects of future blogs and podcasts.

Right now, however, let talk about “rules of thumb.”

Rules of Thumb Are Dumb!

Business valuation experts agree: rules of thumb are dumb.

But we use them anyway!

The most common rule of thumb for what a small business is worth is three times owner cash flow. It comes up all the time because it is often a good general measure of what might make sense. It is sometimes used just to explain why more than three times owner cash flow is too much. Owner cash flow, by the way, is just one of many ways to measure the profitability of a small business.

The rule sounds a little too simple, as well. For example, one could ask: Is that this year’s owner cash flow, last year’s owner cash flow, next year’s projected owner cash flow, or what?! How do you define owner cash flow?

For that matter, how do you define small business? Does a value calculated using this rule of thumb apply to all types and sizes of businesses? Does it include furniture, fixtures and equipment? Does it include inventory? Does it include real estate?

Besides that, how does any rule of thumb take into account all of the other things that matter besides profit?

Is there any way to measure the attractiveness of a business? What about location of the business? What about the stability? What about the systems and the skilled employees? What about seller financing? How do these things impact a rule of thumb?

A rule of thumb, however handy it may seem, is an obvious simplification of a much more complicated reality.

Future Benefits Create Value

The truth, of course, is that only future benefits offer value. Business value is a function of the future benefits the business offers its owner. Future benefits are measured in many ways.

There are cash flow benefits, to be sure. But there are also benefits that relate to an owner’s ability to realize his/her dream. The personal growth and lifestyle and legacy benefits are almost always just as important as cash flow. Companies that acquire other companies often experience synergistic benefits.

Who says so? Well, buyers, of course.

There are, at any one time, at least 500 active business buyer prospects (individuals, companies and groups) roaming around Maine with a variety of wishes and needs. They have their financial limits, of course, but they are almost always looking for a unique business that matches the dream they have in their mind’s eye, or gives them that synergistic fit with the company they already own.

A business buyer might pay three times annual cash flow for a business if his/her goal was purely a 33% pre-tax annual return on investment. But if another buyer wants it for non-financial reasons of growth, lifestyle, legacy and/or synergy, and can live with only a 20% pre-tax annual return, they might pay five times annual cash flow to get it.

The day-to-day reality of business buying and selling is negotiating all these terms and taking into account the many and varied motives of buyers and sellers.

Because individuals, companies and groups measure and define all of these terms a little differently, the range of what people will pay for a small business is usually pretty broad.

Nobody Really Knows

It might shock you to know that no one knows what a business is worth.

Even those of us who are veteran business brokers and appraisers don’t really know. Ultimately, only the person who is making the buying decision can determine value. And the value that they (you) determine is only good in that one moment and may be unique to them (you).

To really figure out what a business is worth takes in-depth knowledge of that specific business. You can’t “drive by” and figure it out.

Even if you know some of the data—like annual gross sales and annual cash flow to the owner—you still can’t figure it out. You must know more than just facts. You must know the subtle nuances of why the business is what it is. You will even need to guess where it is going! Where, indeed, can it go under new ownership?

To understand a business takes in-depth study of its markets. You must know the customers and clients the business serves, and their reasons for buying from this particular business. You must know who the competitors are, and what they offer. You must know how the whole industry works.

To fully understand how a business works, there is a need for long talks with an owner that trusts you. Yes, if the seller of a business does not trust a buyer, the information given to that buyer will never be good enough.

Buyers, don’t bother to buy from people who don’t trust you. Sellers, don’t bother to sell to buyers you don’t like. If the chemistry is not right between a buyer and a seller, it takes an earthquake to get a good negotiation going!

Finally, AFTER you have figured out how the business works, how the markets work, how the industry works and determined whether or not you can get along with the owner, then—and only then—is it time to get busy with the numbers crunching!

Strategy: You’re in Control!

If you need to value a business—yours or someone else’s—there is a process.

It starts with YOU taking control. You need to read at least a few “how to” articles about small business valuation. You need to research the business. You need to study the industry and its markets.

If you are buying a business, all of this starts with a long talk with the owner of the business. Remember though, that if you don’t like the business owner—or the business owner obviously doesn’t like you—then move on to seek another opportunity.

Life is too short—and the odds are too long—to waste your time trying to do the very intimate work of buying or selling with someone on the other side of the table that you don’t like.

In part 5 of this series, I will tell you what NEGOTIATION STRATEGY you must adopt to get your best deal and keep you legally safe.

I would also point my readers, again, to Richard Parker’s BizQuest blog at http://blog.bizquest.com/2009/04/buying-a-business-tips-and-updates.html. He provides many nice tips on buying and selling and I’m happy to link with him.

Two sources of easy-to-find pricing data are BizComps and the annual Business Reference Guide:

BizComps Business Sales Statistics

BizComps is a market data study based upon thousands of small business sales transactions in the U.S., updated annually, but containing data for the last ten years.  The study is available on disk or in printed report format. There is also a free BizComps user guide. Data can be ordered from www.BizComps.com  or www.BVMarketData.com.

2009 Business Reference Guide

This annual guide, now in its 19th year, is the essential guide to pricing businesses with updated “rules of thumb” for over 500 types of businesses.

Pricing data contains rules of thumb, tips from industry experts, benchmark comparison data, financing facts and industry resources.

Order from http://www.businessbrokeragepress.com/

Buying a business is the right thing to do for some people.

In this series of five blogs/podcasts, I’ll discuss all of the major issues about buying a business, especially in today’s opportunity-filled market. This is part 3.

In part 1, I discussed the five things most buyers want in a business purchase and the five things they get. In part 2, we examined the resources a business buyer needs, the background he/she needs, and the home front support such a person needs, too. We also mentioned the knowledge, skills, preferences and passions one needs to get this process to work.

This blog/podcast is about five key questions you need to ask when you begin your search. These are the questions that must be asked of brokers. These are the questions that must be asked of individual business owners who are trying to sell you their business. Although I don’t specifically get into franchises, these are also basic questions you need to ask about any business opportunity, including franchisors and agents who represent franchisors.

5 Questions to Ask

Over many years of hearing buyer prospects ask questions of me, and of the sellers I represent, I see five questions as being vital and basic to all such inquiries.

So many times, buyers waste time asking the WRONG questions, squandering their opportunity to get insights quickly. Or, they don’t even ASK questions, but TALK instead!

When looking for a business to buy, you are looking for something that will work for you. But, the amount of research you need to do is very time consuming, and the chance of wasting that time is very real.

You don’t have time to waste! You can ask the more detailed and less important questions later, if you’re still interested. First, you need to narrow your choices as quickly as possible.

Here are the big five:

What’s for Sale? As you begin to look for a business for sale and respond to an ad or offering from a broker or seller, the first question you need to ask—on the first contact—is “What’s for sale?”

How this question gets answered tells you how organized the broker or seller is, and whether or not they actually understand what they’re selling.

Every business has tangible and intangible assets to sell. The tangible assets are the “things” that make up the business: furniture, fixtures, equipment, vehicles, inventory and real estate. The intangible assets are the “goodwill” or “going concern value,” the seller’s agreement not to compete in the future, and/or to consult with the buyer in the business transfer process.

Searching for a business is always about finding the one what works for you. It all starts with getting a clear view of just what you’re being asked to buy.

What’s the Opportunity? Buying a business should create a new opportunity for the buyer. So, that’s your next question: “What’s the opportunity for me if I buy this business?”

Again, the answer tells you something very valuable. Does the seller really understand where the business can go from here?

Many sellers put their business on the market because they are “burned out.” This “burn out” often creates the very opportunity a buyer wants. Sellers are sometimes so tired that they don’t see market opportunities that are right in front of them!

That is particularly true in this time of rapid advances in science, technology and communications, when older sellers don’t understand what younger buyers can see easily. Recession, too, discourages sellers, making them realize that the business needs a new start under new leadership.

A competent business broker will often be able to make up for the seller’s lack of vision, but not always. If a broker or seller, however, can make a good case for the “upside” opportunity, you are in good shape—ready to go on to the next question.

How was the Price Determined? This is often where the person responding will fail the “sanity check.” It is also the beginning of your negotiation.

The answer that you don’t want to hear is: We added up the losses for the last ten years and that’s how much we want for the business!

While this is obviously intended to be a humorous representation of what actually happens, it often seems that this is, indeed, a valuation method commonly used.

The preferred answer always has some relevance to market information—what buyers pay for such businesses, based upon what is actually a fair return on a buyer’s investment.

We have covered this issue in past blogs and podcasts, and we will cover it again. Right now, the important point is to find out if the person you’re dealing with has any grasp—at all—of this subject. If they do, you’re in luck! On to the next question!

What Financing is Available? A business can’t sell—and you can’t buy—if there isn’t a good source of money to do the deal: either your money, a lender’s money, an equity investor’s money, or the seller’s money.

Prepared brokers and/or sellers have considered this issue carefully. They should be able to explain how much cash down payment you will need, and perhaps how much working capital they also expect you to provide. Then, they should know how much the seller is willing to lend, and how much they expect from a bank or other source. If not, watch out!

Financing a business acquisition is difficult if it requires the use of a third party lender. Banks and others are not excited about business loans to novices that have never run a business before, even if they have a great credit score. Yes, they make loans to businesses—just not too many acquisition loans to inexperienced business buyers!

Equity investors – especially your relatives – can be a good source, but are usually not a reliable one. They tend to back out at the last minute. We brokers understand that better than buyers and sellers. So, if you are the buyer, expect to have to prove that this source is solid if you intend to use it. If your dad, mom, or favorite relative is going to loan you money to buy a business, we’d like to see that money put into your account early on in the process, so the rest of us don’t hear how it’s NOT going to happen later.

The road ahead is much smoother when the seller offers reasonable financing from the beginning. Seller financing is common, seen by buyers and lenders as a seller’s “bond for performance” that the business is healthy. Buyers should also assemble their cash resources before starting the process.

Why is the Seller Selling? Finally, you need to ask about the seller’s motive for selling. It should be something you can understand. If you don’t understand, keep asking this question until you get an answer that you do understand.

Seller’s who are “burned out” are often reluctant to disclose this. First, it is often just personally embarrassing. Second, the sellers might assume—perhaps with good reason—that what they say will frighten you away!

Sellers who can’t see a future opportunity are also reluctant to share their lack of vision. Some other reasons to sell—like divorce or health issues—are also very difficult for sellers to talk about.

If you have gotten this far—to the fifth question—because the answers to the other questions were all acceptable to you, then maybe it’s time to begin the bonding process with the seller. Only then, after you begin a relationship which involves mutual trust, will you get the “real reason” the seller is selling.

When you and the seller finally trust each other enough to tell the truth, then a good deal is possible. You’ll begin to see the real opportunity a successful transaction offers each of you. You will get the business you want and it will likely be a good deal for both of you.

In the last two blogs and podcasts in this series, I will tell you how to follow a VALUATION STRATEGY that will put you in charge, and what NEGOTIATION STRATEGY you must adopt to get your best deal and keep you legally safe.

I would also point my readers to Richard Parker’s BizQuest blog at http://blog.bizquest.com/2009/04/buying-a-business-tips-and-updates.html. He provides many nice tips on buying and selling and I’m happy to link with him.

Buying a business is the right thing to do for some people.

In this series of five blogs/podcasts, I am discussing all of the major issues about buying a business, especially in today’s opportunity-filled market. This is part 2.

This blog/podcast is about what you, the individual buyer, might want, what you should expect to get, and how you should go about doing it, if you decide this unique and special “buying-a-business” path is for you.

Those of you who are individual buyer prospects are usually looking for a business that will employ you as owner/operator. Because you are investing your hard earned money, you want to know that it’s worth it. You want to “run your own show,” an unparalleled personal growth experience. In Maine, especially, we buy businesses that improve our lifestyle. In some cases, it’s more than lifestyle—it’s a personal mission! We intend to leave our mark.

Can you reasonably achieve these objectives with a business purchase? Can you do it now, during a recession?

Yes, you can!

In Part 1 of this series, we listed the five major benefits buyers seek when they buy a business: 1) a job, 2) an investment, 3) an opportunity for personal growth, 4) a chance to live a great lifestyle, and 5) a chance to make a mark and leave some kind of legacy.

We also discussed that buying a business offers all of that by providing its new owner with: 1) immediate cash flow, 2) a known business market position, 3) working systems, 4) trained employees, and 5) the assistance of the business seller.

To buy a business, you need money, skills, energy and time.

Money is an obvious, and how much you need depends, of course, on what you plan to buy. A quick “rule of thumb” for individuals might be that the cash needed for a down payment is often about 1½ times the annual profit expected from the business.

Skills required are mostly sales skills, not accounting or even general management skills. If a buyer knows how to sell, everything else is made easier. Sales skills are toughest to teach. People management skills are more important as the business gets larger, but getting the sales right is the big deal for most businesses.

Energy is another essential. Buying a business requires as much energy as running a business. If you’re not full of enthusiasm and drive, you just won’t survive the rigors of negotiation, financing and transition.

To successfully buy a business, you need role models and a reservoir of personal knowledge. You also need sources of understanding and support, and the ability to take a risk.

Role models are keys to your life. Have you known a successful business owner in your family? Do you admire a business owner? If not, beware. If you spend your days dreaming of being someone’s top employee, you may not have the right model for your own future as a business owner.

You have to be dreaming of being a business owner to be one. Motivating day dreams and images are always important predictors of success in anything.

How’s your inventory of personal knowledge? And, I don’t just mean business knowledge. How well do you know yourself? How good is your knowledge of others? How well do you know how to advance your ideas? How well do you listen?

These types of questions are just as important as knowing about purchasing, pricing, and how to “brand” or position your product or service in a business.

 You need to have support on the home front. Does you mother know where you are?! Your immediate family members have to “get it.” If your family history is only laced with models of employment, and not entrepreneurship, that could be a problem.

Those who are not themselves inspired by the idea of you running your own business will not understand why you are. They often think that you should just climb the corporate ladder and behave yourself in your cubicle!

Finally, can you take the investment risk of buying a business? I’m not talking about gambling in Las Vegas. That’s entertainment, not investment.

Business buyers who learn to run with their strengths are successful. Your experiences, talents, preferences and passions should all merge in your successful business purchase effort.

Go with what you know. If you have spent years in a specialty field, buy a business that uses that knowledge. If you are skilled at some unique aspect of business, buy one that needs that skill. Don’t throw past experiences away. Leverage these experiences.

Know your talents. Pay attention to what others admire about you. If you’re good at something, make sure the business you buy puts you in a position to demonstrate that talent. If you have excelled at some task in the past, make that part of the job you assign yourself in the business you buy.

Know your preferences. If you’re an introvert, you’ll need to learn to sell like an introvert, and not follow the usual extrovert model. If you’re a slow decision-maker, make sure you have a way to make quick decisions when that’s important. Don’t know what I’m writing about? If you’re not familiar with these preference “types,” there’s a good psychological test (the Myers-Briggs Type Indicator - MBTI) that gives you a language to understand your preferences. You need to know about it. My favorite book on the subject is David Kiersey’s Please Understand Me, now in its revised Please Understand Me II edition and available at most large bookstores.

Get passionate about this. Do what you care about. If you can’t find a business in a field that you care about, buy a business that offers you a challenge you care about. All businesses are unique and serve unique markets. But, surprisingly, even an everyday business can offer the interesting challenge you desire.

After taking a personal inventory of your resources, background and support, and your ability to run with your strengths, you are now ready to start contacting sellers and brokers.

In the following blogs and podcasts on this subject, I will tell you 5 QUESTIONS you should to ask when you make your first contact with a business seller or business broker, how to follow a VALUATION STRATEGY that will put you in charge, and what NEGOTIATION STRATEGY you must adopt to get your best deal and keep you legally safe.

As I did in the previous blog, let me also point my readers to Richard Parker’s BizQuest blog at http://blog.bizquest.com/2009/04/buying-a-business-tips-and-updates.html. He provides many nice tips on buying and selling and I’m happy to link with him.

Buying a business is the right thing to do for some people.

In the next five blogs/podcasts, I’ll discuss all of the major issues about buying a business, especially in today’s opportunity-filled market.

This blog/podcast is about what you, the individual buyer, might want, what you should expect to get, and how you should go about doing it, if you decide this unique and special “buying-a-business” path is for you.

Those of you who are individual buyer prospects are usually looking for a business that will employ you as owner/operator. Because you are investing your hard earned money, you want to know that it’s worth it. You want to “run your own show,” an unparalleled personal growth experience. In Maine, especially, we buy businesses that improve our lifestyle. In some cases, it’s more than lifestyle—it’s a personal mission! We intend to leave our mark.

Can you reasonably achieve these objectives with a business purchase? Can you do it now, during a recession?

Yes, you can!

What You Want

Job: Owning and running a business is usually a full-time job. It offers unparalleled freedom of action. You may work very hard, but you will enjoy freedom that no salaried position can give. That’s worth a lot.

Investment: Owning a business offers a great return on investment. A purchased business should return in excess of a 20% pre-tax annual return on your cash invested in down payment and working capital. There are also legitimate expenses which, when paid for by your business, will lower your cost of living. This is often left uncalculated by owners.

Personal Growth: Owning and running a business makes you smarter! And, who among us doesn’t want to be smarter? Working on, and in, your own business will challenge you in every way you can imagine. Most of us don’t grow until we have to. Necessity is the mother of invention. Owning and running your own small business requires you to learn “Street Smarts 101.” It puts you on a personal growth regimen.

Lifestyle: In Maine, owning a small business is “the way life should be.” It really doesn’t matter precisely which service you provide or product you make, distribute or sell. It’s your chance to use the skills you love. It’s your chance to do the part of the job that you like and hire someone to do the parts you’re not so good at. If your business is located near lake or ocean, forest or mountain, (as almost all in Maine are!), it really does allow you to experience a unique “lifestyle.”

Legacy: Making a difference is an everyday experience when you own a business. Your family members, employees, clients and customers are all looking to you to set the pace. Solving business problems always presents an opportunity for deeply touching someone’s spirit. Who doesn’t remember a teacher in their life that made a difference? Business owners are always teachers. It happens at the workplace, but also in the home. Nothing will instill the “entrepreneurial spirit” in someone else like watching you succeed at running your own show.

What You Get

So, what do you get, specifically, when you buy a business? Why not just start your own business? Wouldn’t that be more fun? Aren’t you just buying someone else’s problems?

For some, starting their own business is the only way to go. Those start-up years can be exciting. But, it takes more time to get going when you start your own. It’s riskier—the chance to fail is much greater. It also costs more, not just in time, but in lost financial opportunity.  I know this from personal experience.

In 1981, my wife and I had a chance to buy what was then the most successful business brokerage firm in Maine for just $125,000. Instead, we started our own firm, Maine Business Brokers, largely for reasons of ego (mine, of course, not hers).

In just the first few years, we made little, but the firm we DIDN’T buy made a lot. I can say now, that the decision NOT to buy that firm cost us more than $1 million in lost income. We have eventually succeeded in our “started-from-scratch” company, but it took many more dollars and years than it should have.

Buying an existing business gives you a leg up—several, in fact.

Immediate Cash Flow: A going business provides customers and/or clients that are ready to buy from you the first day. No waiting. Vendors are frequently willing to extend credit to a proven business more so than a new one. A “turn-key” business is what you get. Instead of starting from scratch, which can chew up mounds of working capital before the first customers and clients even realize you exist, buying a business provides immediate cash flow.

Known Market Position: “Location, location, location” can be more than just a reference to the right real estate choice. It’s also a position in a business market—a “piece of real estate” in potential customers’ minds, if you will.

In a purchase, you know where you stand. In a start up, whether or not you will be able to create such a position is a complete unknown. In selling businesses,  there is always major value when a business is “dominant in its market.” Buying a business gives you this known market position.

Working Systems: Don’t underestimate the importance of operating systems that make it all happen. In a successful, established business, these systems are in place.

Remember the last time you did something you never did before? Well, when your money is on the line, you want a business with proven systems, not a first-time-out experience. Buying a business gives you working systems.

Trained Employees: It takes months to train even one employee. Even if the employees aren’t perfect (hint: they NEVER are!), at least existing employees can get from opening to closing each day, probably even without you.

There is an unrealistic fear among buyers that employees will abandon a new owner. In truth, when an existing business is sold, employees often respond with great enthusiasm to a new owner’s arrival. They are eager to tell the new owner their ideas. The good ones see it as a second chance for a new start, for them and for the business.

Seller Assistance: After the tensions of the purchase and sale process, the seller may very well be a fountain of wisdom, energy and help. Even if you don’t follow all of their advice (they don’t expect you to, anyway), it is still worth listening to. They know answers to questions you forgot to ask before you bought—ones that it might take you years to learn if you were starting from scratch.

And, did we mention seller financing? Yes, sellers will often even “play bank” for you—becoming a “partner” in your success. There is nearly always a good reason to take advantage of a seller’s assistance.

So, why buy a business? Buying a business is exciting! You get a job and an investment all rolled up in one, with an opportunity for personal growth, a unique lifestyle and a chance to establish a rich legacy for yourself and your family.

The advantages of buying an existing business vs. starting one are immediate cash flow, known market position, working systems, trained employees and seller assistance.

But, before you start, you must get clear about who you are and what you want to do.

What’s Next?

In the following blogs and podcasts on this subject, I will tell you what RESOURCES YOU NEED before you start, 5 QUESTIONS you should to ask when you make your first contact with a business seller or business broker, how to follow a VALUATION STRATEGY that will put you in charge, and what NEGOTIATION STRATEGY you must adopt to get your best deal and keep you legally safe.

I would also point my readers to Richard Parker’s BizQuest blog at http://blog.bizquest.com/2009/04/buying-a-business-tips-and-updates.html. He provides many nice tips on buying and selling and I’m happy to link with him.

There is a simplified method for appraising most businesses. And we are covering it in a five-part series of daily blogs and podcasts. This is part 5.

In part 1, we discussed the need for business appraisals. We noted that they can cost as much as $35,000 for just a normal business! We said that there is a better way for business owners to get the answers they need.

In part 2, we discussed how we arrived at a multiple of 3 to apply to seller’s discretionary earnings (SDE) for a business asking price. What the historical sales show is that small businesses tend to sell for between 1.5 and 3.5 times historical SDE, not including inventory and/or real estate.

The data is messy, however, so a multiple of 3x SDE is often used in business pricing, and why this multiple might be even more appropriate today.

In part 3, we discussed the adjustments that need to be made when calculating SDE. The expenses of the business need to be adjusted back to one owner/operator to make the business sales data we can find reasonably comparative to each other. That has already been done for us in BizComps^®. But, we still have to do it for the subject business that we are trying to value.

In part 3, we also discussed that the tangible and intangible assets needed to run the business are included in the multiple-derived value, EXCEPT real estate, inventory for resale, accounts receivable AND, usually, the owner’s personal vehicle. Inventory for resale is valued at the lesser of cost or wholesale, and is added to any multiple-derived value. Accounts receivable are usually collected by the previous owner after the sale and during the transition period between owners, so they are NOT usually sold with the business.

In part 4, we discussed separating real estate value from business value for appraisals that need to encompass both a business and the real estate it occupies.

Because commercial real estate is a different kind of investment, its value is often expressed as a multiple of its annual net operating income (NOI) (gross scheduled annual rent less annual property expenses).

Real estate is different in a couple of important ways. An argument can be made that it is much less risky of an investment than is a business. It also is often owned by an “investor” as a much more passive investment than a business, not requiring the intensive hands-on owner management that a small business usually requires.

This real estate NOI multiplier is larger than a business SDE multiplier. Real estate multipliers of NOI are often in the 8 to 12 range in 2009 in Maine. Small business SDE multiples are in the 1.5 to 3.5 range today.

Finally, the last point in this blog series is to note that we are not considering business debt here in this simplified analysis.

This formula assumes a debt-free business. Existing business debt
obviously must be subtracted from the value estimate to arrive at a net figure for the seller. In addition, if a buyer assumes debt when buying, it is counted as part of the purchase price in this model.

As we pointed out in the first part of this 5-part blog/podcast series, knowing what a business is worth is critical today. Many business owners are trying to figure out what their businesses are worth in this troubled economy.

More than in normal times, they need to know what the business is worth to re-finance, sell in a volatile market, restructure the company, or even to prepare for possible bankruptcy.

Yet, business appraisals are VERY EXPENSIVE.

A business appraisal of the quality that meets today’s appraisal standards takes 40 or more hours of work to produce. At the going rate of from $200 to $400 per hour for accredited appraisers, a business appraisal for most companies will run from $8,000 to $16,000 and up.

The more complicated the company, the more hours needed. And, that’s just for a basic report! It is not at all unusual to talk to an owner who just spent $35,000 on a business appraisal.

Before any business owner goes to that expense, however, it is better to at least TRY to get by with a ballpark estimate using the simplified method we have described in this short blog/podcast series.

If you don’t have to prove value to a bank, the IRS or a court, reasonably bright business people can sit in a room and figure this out, WITHOUT a $35,000 report.

Attached to this blog is a chart that summarizes what this series is about.

We hope you have found this blog/podcast series helpful. There are other helpful business valuation articles on our website.

The "Formula" and relevant considerations for appraising a small business. Does not apply to very large businesses or businesses, like hotels and campgrounds, that are mostly real estate purchases.

 

There is a simplified method for appraising most businesses. And we are covering it in a five-part series of daily blogs and podcasts. This is part 4.

In part 1, we discussed the need for business appraisals. We noted that they can cost as much as $35,000 for just a normal business! We said that there is a better way for business owners to get the answers they need.

In part 2, we discussed how we arrived at a multiple of 3 to apply to seller’s discretionary earnings (SDE) for a business asking price. What the historical sales show is that small businesses tend to sell for between 1.5 and 3.5 times historical SDE, not including inventory and/or real estate.

The data is messy, however, so a multiple of 3x SDE is often used in business pricing. This multiple, which might be a little high for some businesses, is a good starting point for an asking price for a small business most of the time, perhaps especially now when stock and real estate investments are suffering by comparison.

In part 3, we discussed the adjustments that need to be made when calculating SDE. The expenses of the business need to be adjusted back to one owner/operator to make the business sales data we can find reasonably comparative to each other. That has already been done for us in BizComps^®. But, we still have to do it for the subject business that we are trying to value.

In part 3, we also discussed that the tangible and intangible assets needed to run the business are included in the multiple-derived value, EXCEPT real estate, inventory for resale, accounts receivable AND, usually, the owner’s personal vehicle. Inventory for resale is valued at the lesser of cost or wholesale, and is added to any multiple-derived value. Accounts receivable are usually collected by the previous owner after the sale and during the transition period between owners, so they are NOT usually sold with the business.

The large item we haven’t yet discussed is the real estate occupied by the business.

Real estate is not included in the multiple-derived value of a business; so, if real estate is going to be part of the valuation, we need to add it to the business value that we calculate. But, if we do that, the expenses of the business must be adjusted to reflect payment of a reasonable “fair market rent” of whatever real estate is needed by the business.

It is not unusual to see an analysis that omits this step.

Business owners who own the real estate that their business occupies often fail to charge themselves rent. This creates the perception that the business is more profitable than it otherwise would be. Rental expense that is either too low or too high, for a business that occupies real estate, creates a distorted SDE.

To separate the real estate and business values is necessary, because real estate is usually a separate investment calculation. Commercial real estate derives its value from “Net Operating Income” (NOI).  Annual NOI is scheduled rental income less vacancy and credit losses, less building operating expenses not paid by the tenant. NOI is capitalized to calculate the value of the real estate as a stand-alone investment.

What’s “fair market rent?” Well, fair market rent is what a willing tenant would otherwise pay for the space as rent. Or, in some cases, it might also be the rent that such a business that uses that type of space can afford, usually as a percentage of its annual gross sales. Industry associations often have such data.

For example, let’s say we have a modern, well-equipped and well-located pizzeria we own. And, we also own the free-standing building it occupies. Let’s say we have a 2,000 sq. ft. building right next to the area’s major shopping center with 50 seats doing $1,000,000 annual sales. So, what are the business and the building worth as a combined sale?

Such a pizzeria can afford about 6% of gross sales as rent, according to pizza industry data. If that is true at the time we’re valuing this pizzeria, then the pizzeria can afford $60,000 in annual rent. If we assume that the pizzeria expenses already include building taxes, insurance and maintenance (as they usually do when the owner of both building and business is the same), then that net rent of $60,000 is close to NOI for the building.

In our area, such a building would be worth about 10 times NOI, or $600,000.

If, after paying $60,000 in annual rent, our pizzeria still made $150,000 SDE for its owner/operator, the business should probably be priced at $450,000, with the building at $600,000, for a total of $1,050,000.

Would it sell for that? Well, it might, but negotiation would probably take it down to $300,000 for the business and $500,000 for the building in our market in 2009.

Inventory for resale in a pizzeria is minimal. Most pizzerias are supplied daily in most urban areas, keeping only a small inventory on hand, the value of which is mostly in alcoholic beverages if the pizzeria has such licenses.

If the owner were NOT paying any rent to himself, the P&L for the business might show an SDE of $210,000 and we would be greatly distorting the value of the business if we used a multiple of 3.

Now, we used industry operating expense ratios to determine fair rent. We should also check with local commercial real estate sources (appraisers, brokers, local government business development agencies) about fair market rent for similar properties.

$60,000 annual rent for 2,000 sq. ft. of retail is $30/sq. ft. /year. That’s about right in our market today for such a building.

In part 5 of this blog, we’ll summarize and tell you where you can get help with this process.

There is a simplified method for appraising most businesses. And we are covering it in a five-part series of daily blogs and podcasts. This is part 3.

In part 1, we discussed the need for business appraisals. We noted that they can cost as much as $35,000 for just a normal business! We said that there is a better way for business owners to get the answers they need.

In part 2, we discussed how we arrived at a multiple of 3 to apply to seller’s discretionary earnings (SDE). What the historical sales show is that small businesses tend to sell for between 1.5 and 3.5 times historical SDE, not including inventory and/or real estate.

The data is messy, however, so a multiple of 3x SDE is often used in business pricing, and is probably more justifiable today than ever before. This multiple, which might be a little high for some businesses, may not be too high today because competing investments of stock and real estate have suffered lately as comparative investments for would-be business buyers.

In other words, if a small business is providing it’s owner/operator with a salary and many indirect benefits worth, say, $100,000 per year, then that business may well be worth $300,000, or 3 times the annual cash flow to the owner, known in BizComps^® as seller’s discretionary earnings, or SDE.

Got it?

At this point, nearly everyone asks questions that begin with, “But what if . . .? or But, what about . . .?

Let’s consider 4 of the most common questions in today’s blog:

1) What if the current owner/operator’s salary is too high or too low? What if a whole family runs the business?

2) What about the value of the furniture, fixtures and equipment? Is it included in the multiple-derived business value? What about the owner’s vehicle?

3) What about the value of the inventory? How’s it calculated?

4) What about accounts receivable? Who gets that?

Before we can properly answer any of these questions, we need to
provide just a little more basic detail on two issues – accuracy of the data and how the 3 times SDE “rule of thumb” is most often used. Then we can tackle some specific adjustments.

When calculating seller’s discretionary earnings, BizComps^® uses “the most recent reporting period.” How that data is reported can be inaccurate, of course, but that is really an issue for another day. MOST of it IS accurate. That’s the best we’re ever going to get, in any data base, assembled over many years from many sources.

In actual practice, however, the 3 times SDE “rule of thumb” is often applied to future projected earnings. In the real world, buyer prospects don’t really care about the most recent reporting period. They are usually thinking ahead of what the future will hold for them. What the current owner did last year is not as important as what’s happening now, and what estimates the buyer makes of future cash flows.

Is that the “right way” to do it? We could debate that for a long time.

On the specific “What if” and “What about” questions, let’s try to answer a few here.

Answer to Question #1: For the “owner’s salary,” there is not only the adjustment for formal salary, but also for other owner benefits. To obtain uniformity of the data, there is a requirement of adjusting the expenses back to just one owner. If multiple owners run a business, these adjustments can get pretty tricky.
 
Answer to Question #2: Within the multiple-derived price, the business’ furniture, fixtures and equipment are included, along with all intangible assets. In most cases, the owner’s personal vehicle is not included.

Answer to Question #3: Inventory and work in process values also need to be added at the lesser of cost or wholesale market price. This is NOT included in the multiple-derived value.

Answer to Question #4: Finally, accounts receivable are most often retained by sellers, collected in the transition period following a sale. They are rarely sold.

So, in summary so far:

BizComps^® separates the reported business selling price from the sale of inventory and real estate. If we say, for example, that a business is worth “3 x SDE,” it is because there are many comparative transactions to show that businesses often sell for prices which reflect this multiple.

This “3 x SDE,” then becomes our quickest ballpark estimate of business “value.” We use it cautiously before completing any further homework to refine our estimate.

In part 4 of this blog, we’ll discuss the separation of real estate value from business value, and why and how that must be done in any business appraisal. In part 5, we’ll summarize and tell you where you can get help with this process.

There is a simplified method for appraising most businesses. And we are covering it in a five-part series of daily blogs and podcasts. This is part 2.

In part 1, we discussed the need for business appraisals. We noted that they can cost as much as $35,000 for just a normal business! We said that there is a better way for business owners to get what they need.

So, what’s the method?

The short-cut method that would allow anyone to value a business in less than an hour comes from the use of comparable data from businesses that have sold.

1) BizComps,^®  (available at http://www.bvmarketdata.com/).

2) Pratt’s Stats^®, (available at http://www.bvmarketdata.com/), and

3) The Institute of Business Appraisers (IBA) database. (data available only to IBA members)

Pratt’s Stats^® and the IBA database have similar, but not exactly the same, earnings definitions for small businesses. In today’s blog/podcast, we’re only going to work with BizComps^® definition, but if you use the other databases, beware that there is a difference you will need to adjust for, if comparing data from one to the other.

SDE, the BizComps^® definition for small business profitability, is calculated by taking EBITDA and adding owner’s salary.

EBITDA, a common accounting definition of earnings, is “earnings before interest, taxes, depreciation and amortization.”

Technically, SDE also calls for the adding back of all non-cash, non-operating and non-recurring expenses, as well as income taxes paid, but for most small businesses, these are either obvious, inconsequential, and/or illegal for you CPAs out there, and we business brokers, to even know about, so we are ignoring them here.

SDE, or “cash flow to the owner,” is thought to be a more appropriate measure
of earnings for smaller businesses.

EBITDA, when it is used instead, is used mostly to measure earnings of the so-called “mid market” businesses - those with professional management separate from ownership.

What the historical sales data in these databases tends to show is that small businesses tend to sell for between 1.5 and 3.5 times historical SDE, not including inventory and/or real estate.

The data is messy, however, so a multiple of 3x SDE is often used in business pricing. This multiple, which might be a little high for some businesses, is a good starting point for an asking price.

Actually, I would argue that, even though the economy is in a current recession, this value of 3 times SDE is even more valid today as a pricing “rule of thumb” than in better times. The BizComps^®  average has always hovered around a 2 times SDE multiple, but today, I really think that is going up to 3 times SDE.

In better times, competing investments seemed to be less risky. Stocks and real estate seemed never to go down. Now that we see stocks and real estate decline in value, that actually improves the competitive position of a small business investment, in my opinion, particularly to a laid-off middle management worker, the kind of person who most frequently buys a business!

So, today I leave you with this thought. The value of a small business today is likely to be around 3 times SDE, seller’s discretionary earnings, also known as “cash flow to the owner,” as measured in the BizComps^® database.

In part 3 of this blog, we’ll talk more about this and apply some numbers. In part 4, we’ll discuss exceptions and adjustments. In part 5, we’ll summarize and tell you where you can get help with this process.