A Reasonable Price for Private Companies

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Putting a price on privately-held companies is more complicated than placing a value or price on a publicly-held one. For one thing, many privately-held businesses do not have audited financial statements; these statements are very expensive and not required. Public companies also have to reveal a lot more about their financial issues and other information than the privately-held ones. This makes digging out information for a privately-held company difficult for a prospective purchaser. So, a seller should gather as much information as possible, and have their accountant put the numbers in a usable format if they are not already.

Another expert has said that when the seller of a privately-held company decides to sell, there are four estimates of price or value:

  1. A value placed on the company by an outside appraiser or expert. This can be either formal or informal.
  2. The seller’s “wish price.†This is the price the seller would really like to receive – best case scenario.
  3. The “go-to-market price†or the actual asking price.
  4. And, last but not least, the “won’t accept less than this price†set by the seller.

The selling price is usually somewhere between the asking price and the bottom-dollar price set by the seller. However, sometimes it is less than all four estimates mentioned above. The ultimate selling price is set by the marketplace, which is usually governed by how badly the seller wants to sell and how badly the buyer wants to buy.

What can a buyer review in assessing the price he or she is willing to pay? The seller should have answers available for all of the pertinent items on the following checklist. The more favorable each item is, the higher the price.

  • Â Stability of Market
  • Stability of Historical Earnings
  • Â Cost Savings Post-Purchase
  • Â Minimal Capital Expenditures Required
  • Â Minimal Competitive Threats
  • Â Minimal Alternative Technologies
  • Â Reasonable Market
  • Â Large Market Potential
  • Â Reasonable Existing Market Position
  • Â Solid Distribution Network
  • Â Buyer/Seller Synergy
  • Â Owner or Top Management Willing to Remain
  • Â Product Diversity
  • Â Broad Customer Base
  • Â Non-dependency on Few Suppliers

There may be some additional factors to consider, but this is the type of analysis a buyer should perform. The better the answers to the above benchmarks, the more likely it is that a seller will receive a price between the market value and the “wish†price.

© Copyright 2015 Business Brokerage Press, Inc.

Photo Credit: cohdra via morgueFile

First Done Deal of 2015

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Empire Business Solutions, a leading Business Broker and M&A Company based in Huntington Beach is pleased to announce the first successful transaction of  2015.  Roy Moss, President of Empire, said “We are quite excited about the prospects for a very active 2015 and this first “Done Deal” of the year is proof that we are off to a very good start.

Tombstone

This was a California-based manufacturer and distributor of plumbing and HVAC (heating, ventilation and air conditioning) supplies. The products are manufactured in China.  The company has one full time employee to oversee the Q/C and supply sourcing in China.   The company maintains an active inventory of 600 SKUs and caters to the wholesale market segment, maintaining a customer base of approximately 260 customers. Products are distributed throughout the United States. The company has inventory-stocking sales representatives in Texas, Massachusetts, and Colorado. Total revenue was $4.5million in 2014 with EBITDA at $600,000.

The Company was purchase for approximately $1.9 mil by a small investor driven PEG from out of state with seller financing and earn out part of the deal structure.

M&A activity from Main Street to Wall Street seems very active and most forecasts from the leading websites are pointing to increased transactions in 2015.

A recent report from a prominent  business for sale website confirms these growth projections.   Their survey of brokers revealed a record number of transaction for 2014 since they started keeping track in 2007.  The significant increase in the volume of closed deals can be attributed to couple factors.  First is the survey reported an increase in qualified buyers who have entered the market.  The second important factor was the overall improvement in the business environment.  Businesses are performing at a much higher level in terms of revenues and profits which improves their valuations.  The median asking prices are growing due to the higher financials being reported.  Additionally, as we have reported before, the number of business going to market continues to increase because of the Baby Boomers retiring and wanting to exit their businesses.  It is expected that more Baby Boomers will exit in 2015 than in 2014.

All of these factors lead all in our industry to believe 2015 will be a good one.

Empire Business Solutions has been a leading Business Broker and M&A Specialist since 2005 in the Orange County and Los Angeles County area.  Empire specializes in representing sellers in Southern California who want to maximize the value of their business.

Contact Roy Moss, President of  Empire Business Solutions at 714-374-6430 to discuss the process in selling or buying a business in Southern California.

 

Top Ten Mistakes Made By Sellers

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  1. Neglecting the day-to-day running of their business with the reasoning that it will sell tomorrow.
  2. Starting off with too high a price with the assumption the price can always be reduced.
  3. Assuming that confidentiality is a given.
  4. Failing to plan ahead to sell / deciding to sell impulsively.
  5. Expecting that the buyers will only want to see last year’s P&L.
  6. Negotiating with only one buyer at a time and letting any other potential buyers wait their turn.
  7. Having to reduce the price because the sellers want to retire and are not willing to stay with the acquirer for any length of time.
  8. Not accepting that the structure of the deal is as important as the price.
  9. Trying to win every point of contention.
  10. Dragging out the deal and not accepting that time is of the essence.

© Copyright 2015 Business Brokerage Press, Inc.

Photo Credit: jppi via morgueFile

Why Sell Your Company?

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Selling one’s business can be a traumatic and emotional event. In fact, “seller’s remorse†is one of the major reasons that deals don’t close. The business may have been in the family for generations. The owner may have built it from scratch or bought it and made it very successful. However, there are times when selling is the best course to take. Here are a few of them.

  • Burnout – This is a major reason, according to industry experts, why owners consider selling their business. The long hours and 7-day workweeks can take their toll. In other cases, the business may just become boring – the challenge gone. Losing interest in one’s business usually indicates that it is time to sell.
  • No one to take over – Sons and daughters can be disenchanted with the family business by the time it’s their turn to take over. Family members often wish to move on to their own lives and careers.
  • Personal problems – Events such as illness, divorce, and partnership issues do occur and many times force the sale of a company. Unfortunately, one cannot predict such events, and too many times, a forced sale does not bring maximum value. Proper planning and documentation can preclude an emergency sale.
  • Cashing-out – Many company owners have much of their personal net worth invested in their business. This can present a lack of liquidity. Other than borrowing against the assets of the business, an owner’s only option is to sell it. They have spent years building, and now it’s time to cash-in.
  • Outside pressure – Successful businesses create competition. It may be building to the point where it is easier to join it, than to fight it. A business may be standing still, while larger companies are moving in.
  • An offer from “out of the blue†– The business may not even be on the market, but someone or some other company may see an opportunity. An owner answers the telephone and the voice on the other end says, “We would like to buy your company.â€

There are obviously many other reasons why businesses are sold. The paramount issue is that they should not be placed on the market if the owner or principals are not convinced it’s time. And consider an old law that says, “The time to prepare to sell is the day you start or take over the business.â€

Empire Business Solutions Celebrated Its 10th Anniversary

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Empire Business Solutions, a leading Business Broker and M&A Company based in Huntington Beach is pleased to announce that 2015 marks the 10th Anniversary for this Southern California intermediary.   Started in 2005, Realestate Opportunities & Investments, Inc, dba Empire Business Solutions, opened its doors with the mission of helping business owners realize their dreams of financial security by selling their business.

As experienced M&A professionals, Empire completely understands the life span of a business.  From start up through acquisition, merger or to presenting your business for sale, Empire has established our principles for success;

*Strict confidentiality with free consultation

*Strong client representation

*Solid evaluation

*Energetic Marketing

As President of Empire with over 35 years experience in all aspects of the business and sales process, Roy Moss has  personally involved himself in every transaction.  Through continued education and experience, Roy Moss and Empire manage the complex M&A transactions along with its team of professional experts which range from environmental to legal.  The goal is to arrive at a successful transaction for buyers and sellers.

Over the last ten years of service to the Southern California and Orange County business community representing buyer and sellers, Empire Business Solutions has participated in

over sixty different successful transactions.  Here is a partial list of successful transactions:

Done Deals

(Partial List)

Beco Mfg

Eastman-Bell Mfg

EML Laboratories

D&A Coatings

Pastorello Construction

USECC

Virtuoso Video Productions

Business Opportunity Journal

Islander BBQ

Avant Garde Salon

Origins Massage & Bodyworks

Skin Rx

Pet Pantry

Lisa Belle Salon

Tommy Bahama Retailer

Spa World Mfg

Gauthier Spa and Salon

Pasadena Med Spa

Carpolicy.net

California Greetings

Bershea

Colton Radiator

Midas

Reliable Auto Care

Focus Medical

Hairfree

Studio Exchange

Shah Legal

Lincoln Institute of Massage

It’s A Grind

Bamboo & Beyond

Pura Vida

KG Spa

Photomakers

OC Spa

Lil Angels Photography

Advanced Laser Clinic

Spa  Del Mar Location

Midas-Barstow

Wright’s Automotive

The deals over the last ten years have ranged from main street businesses to lower middle market M&A transactions.   The experience and personally attention to our clients have made Empire Business Solutions a leading Business Broker and M&A Specialist since 2005 in the Orange County and Los Angeles County area.  Empire specializes in representing sellers in Southern California who want to maximize the value of their business.

Contact Roy Moss, President of  Empire Business Solutions at 714-374-6430 to discuss the process in selling or buying a business in Southern California.

Who Is the Buyer?

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Buyers buy a business for many of the same reasons that sellers sell businesses. It is important that the buyer is as serious as the seller when it comes time to purchase a business. If the buyer is not serious, the sale will never close. Here are just a few of the reasons that buyers buy businesses:

  • Laid-off, fired, being transferred (or about to be any of them)
  • Early retirement (forced or not)
  • Job dissatisfaction
  • Desire for more control over their lives
  • Desire to do their own thing

A Buyer Profile

Here is a look at the make-up of the average individual buyer looking to replace a lost job or wanting to get out of an uncomfortable job situation. The chances are he is a male (however, more and more women are going into business for themselves, so this is rapidly changing). Almost 50 percent will have less than $100,000 in which to invest in the purchase of a business. In many cases the funds, or part of them, will come from personal savings followed by financial assistance from family members. The buyer will never have owned a business before, and most likely will buy a business he or she had never considered until being introduced to it.

Their primary reason for going into business is to get out of their present situation, be it unemployment or job disagreement (or discouragement). Prospective buyers want to do their own thing, be in charge of their own destiny, and they don’t want to work for anyone. Money is important, but it’s not at the top of the list, in fact, it probably is in fourth or fifth place in the overall list. In order to pursue the dream of owning one’s own business, buyers must be able to make that “leap of faith†necessary to take the risk of purchasing and operating their own business.

Buyers who want to go into business strictly for the money usually are not realistic buyers for small businesses. Keep in mind the following traits of a willing buyer:

  • The desire to buy a business
  • The need and urgency to buy a business
  • The financial resources
  • The ability to make his or her own decisions
  • Reasonable expectations of what business ownership can do for him or her

What Do Buyers Want to Know?

This may be a bit premature since you may not have decided to sell, but it may help in your decision-making process to understand not only who the buyer is, but also what he or she will want to know in order to buy your business. Here are some questions that you might be asked and should be prepared to answer:

  • How much money is required to buy the business?
  • What is the annual increase in sales?
  • How much is the inventory?
  • What is the debt?
  • Will the seller train and stay on for awhile?
  • What makes the business different/special/unique?
  • What further defines the product or service? Bid work? Repeat business?
  • What can be done to grow the business?
  • What can the buyer do to add value?
  • What is the profit picture in bad times as well as good?

Buying (or Selling) a Business

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The following is some basic information for anyone considering purchasing a business. Is may also be of interest to anyone thinking of selling their business. The more information and knowledge both sides have about buying and selling a business, the easier the process will become.

A Buyer Profile

Here is a look at the make-up of the average individual buyer looking to replace a lost job or wanting to get out of an uncomfortable job situation. The chances are he is a male (however, more women are going into business for themselves, so this is rapidly changing). Almost 50 percent will have less than $100,000 in which to invest in the purchase of a business. More than 70 percent will have less than $250,000 to invest. In many cases the funds, or part of them, will come from personal savings followed by financial assistance from family members. He, or she, will never have owned a business before. Despite what he thinks he wants in the way of a business, he will most likely buy a business that he never considered until it was introduced, perhaps by a business broker.

His, or her primary reason for going into business is to get out of his or her present situation, be it unemployment, job disagreement, or dissatisfaction. The potential buyers now want to do their own thing, be in charge of their own destiny, and they don’t want to work for anyone. Money is important, but it’s not at the top of the list, in fact, it is probably fourth or fifth on their priority list. In order to pursue the dream of owning one’s own business, the buyer must be able to make that “leap of faith†necessary to take the plunge. Once that has been made, the buyer should review the following tips.

Importance of Information

Understand that in looking at small businesses, you will have to dig up a lot of information. Small business owners are not known for their record-keeping. You want to make sure you don’t overlook a “gem†of a business because you don’t or won’t take the time it takes to find the information you need to make an informed decision. Try to get an understanding of the real earning power of the business. Once you have found a business that interests you, learn as much as you can about that particular industry.

Negotiating the Deal

Understand, going into the deal, that your friendly banker will tell you his bank is interested in making small business loans; however, his “story†may change when it comes time to put his words into action. The seller finances the vast majority of small business transactions. If your credit is good, supply a copy of your credit report with the offer. The seller may be impressed enough to accept a lower-than-desired down payment.

Since you can’t expect the seller to cut both the down payment and the full price, decide which is more important to you. If you are attempting to buy the business with as little cash as possible, don’t try to substantially lower the full price. On the other hand, if cash is not a problem (this is very seldom the case), you can attempt to reduce the full price significantly. Make sure you can afford the debt structure–don’t obligate yourself to making payments to the seller that will not allow you to build the business and still provide a living for you and your family.

Furthermore, don’t try to push the seller to the wall. You want to have a good relationship with him or her. The seller will be teaching you the business and acting as a consultant, at least for a while. It’s all right to negotiate on areas that are important to you, but don’t negotiate over a detail that really isn’t key. Many sales fall apart because either the buyer or the seller becomes stubborn, usually over some minor detail, and refuses to bend.

Due Diligence

The responsibility of investigating the business belongs to the buyer. Don’t depend on anyone else to do the work for you. You are the one who will be working in the business and must ultimately take responsibility for the decision to buy it. There is not much point in undertaking due diligence until and unless you and the seller have reached at least a tentative agreement on price and terms. Also, there usually isn’t reason to bring in your outside advisors, if you are using them, until you reach the due diligence stage. This is another part of the “leap of faith†necessary to achieve business ownership. Outside professionals normally won’t tell you that you should buy the business, nor should you expect them to. They aren’t going to go out on a limb and tell you that you should buy a particular business. In fact, if pressed for an answer, they will give you what they consider to be the safest one: “no.†You will want to get your own answers–an important step for anyone serious about entering the world of independent business ownership.

Orange County Business for Sale Market

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LOOK AT THESE FACTS…

The Baby Boomers (about 70,000,000 of them) are poised to make a great impact on the American economy.

  • Retiring Boomer business owners will sell or bequeath $10 trillion worth of assets over the next two decades.
  • These assets are held in more than 12 million privately owned businesses.
  • More than 70 percent of these companies are expected to change hands.
  • The sale of almost 12 million businesses over the next 10 to 15 years represents a significant increase in the annual number of businesses that will be sold.
  • These owners of businesses should have a valuation performed by a business broker, to map out a strategy for selling and structuring the sale of the business.
  • Planning ahead will enable business owners to achieve the best transaction possible during this Boomer-induced wave of business sales.
  • The 12,000,000 businesses likely to change hands over the next 10-15 years might involve a large number of boomer-to-boomer sales.
  • Baby Boomers ages 45 to 64 form businesses at a higher rate than other age groups.
  • 55 to 64 year olds form businesses at the highest rate of any age group.
  • Many of the Baby Boomers are too young to retire; they typically have ample capital through savings, investments or other assets; they have job-related skills accumulated through a lifetime of work; and many have lost faith (and money) as a result of large company layoffs and restructurings; and many will buy their own business in coming years.
  • Many Boomers find themselves unhinged from their traditional employment safety nets. This dislocation has fueled an intense desire and need to have control of their destinies.
  • Ironically, now small business ownership is seen as much more safe and secure than working for a large company.
  • So, in the coming decades, not only are we likely to see millions of Baby Boomers selling businesses they now own, we will also see additional millions of Boomers (who’ve spent their lives working for someone else), buying businesses.
  • The next two decades will see a significant increase in the number of small and mid-sized businesses being bought and sold by Baby Boomers, in addition to the other generations of Americans.

What Companies are Buyers Looking For In Orange County

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Top Ten Businesses for October 2014:

  1. Restaurants
  2. Convenience Stores
  3. E-Commerce
  4. Bars
  5. Fast Food – Non Franchises
  6. CaféBars
  7. Sandwich Shops & Delivery
  8. Auto Repair, Service & Parts
  9. Liquor Stores/Off Licences/Wine Merchants
  10. Gas/Petrol Service Stations

Top Ten M&A Businesses for October 2014:

  1. Distribution Businesses
  2. Car Wash & Valet
  3. Gas/Petrol Service Stations
  4. Mining Businesses
  5. Fabrication Businesses
  6. Main Contractors
  7. Construction Businesses
  8. Manufacturing Businesses
  9. Wholesale Businesses
  10. Road Haulage & Freight Services

Free Broker Opinion of Value For Qualified Sellers In Orange County

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M&A and Business Broker activity is very high due to a number of reasons.  The revenues and profits for most business have increased and therefore the valuation for these businesses has moved upward.  Business owners who put off selling their business due to the “great recession†are now contemplating a sale.  Another, even more significant trend, is the Baby Boomer generation who want to retire.  It is estimated of the approximately 700,000 Baby Boomers, about 12 million own privately held businesses.  These 12 million businesses are likely to change hands over the next 10-15 years.

Before a business owner, whether a Baby Boomer or not, sells the business, he or she needs to get an estimate of what the business will bring on the open market.  A formal Valuation can cost between $5,000 and $10,000 depending on the size and complexity of the business.  If a seller wants to know if his perception of the value of his business, he should either do a formal Valuation or ask a Broker to do a Broker Opinion of Value.

Before putting a business on the market, a seller (or a buyer) should get an idea of the worth of the business.  There are several ways to value a business but most are based upon the re-cast cash flow of the business.  One way is to value by “rule of thumbâ€Â  which is a shortcut analysis of a business’s value, usually expressed as a multiple of the annual re-cast earnings of the business or Seller’s Discretionary Earnings (SDE).  In general,  a small business with a full-time working owner is worth from 1 to 3 times its annual SDE, with businesses producing SDE under $50,000 falling closer to the “1x†and businesses producing SDE of $100,000 or more valued closer to the “3x.â€Â  The value must be tempered by the risk assessment which can either increase or decrease the valuation.  Another way to value a business is to compare the cash flow of the business to the sales price of other businesses that have sold.  This market comparison approach will reveal the multiples of SDE on past business that have been sold which can then be applied to the business being sold. A good Broker will have sources to access to these “compsâ€.  The market comparison approach is more likely to yield a more accurate valuation.

Empire Business Solutions is offering a Free Broker Opinion of Value to all qualified business owners.  Empire believes you should have an estimate of the value of your business BEFORE you make the decision to sell.  Call us at 714-374-6430 to discuss the details.

Empire Business Solutions has been a leading Business Broker and M&A Specialist since 2005 in the Orange County and Los Angeles County area.  Empire specializes in representing sellers in Southern California who want to maximize the value of their business.