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Hot Business List ~ April 2013

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May 21, 2013

Below you will find the current “hot†business list courtesy of data from Businesses For Sale. We asked Businesses For Sale for a monthly ranking of business types based on the number of “hits†on their site. This ranking is not based on the actual sale of businesses.

Top Ten Businesses for April 2013:

  1. E-Commerce Businesses
  2. Health and Fitness Clubs
  3. Websites
  4. Convenience Stores
  5. Restaurants
  6. Auto Repair, Service and Parts
  7. Bars
  8. Delicatessens
  9. Marketing Businesses
  10. Fast Food Franchises

Top Ten M&A Businesses for April 2013:

  1. Tennis Clubs
  2. Manufacturing
  3. Distribution Businesses
  4. Construction Businesses
  5. Home and Garden Businesses
  6. IT
  7. Recruitment Businesses
  8. IT Manufacturing
  9. Specialist Subcontractors
  10. Fabrication Businesses

 

Selling Your Businesses in Orange County in the Summer

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Summer is a difficult and interesting time for selling businesses.  As most buyers go on vacation with their families, dealflow usually shrinks and almost all communication stops until the kids go back to school. The slowdown creates a little breathing room for everyone to reevaluate their positions to see if everything from Asking Price to updated financials are all proper and in place.   After the kids go back to school, the activity will get back to normal with the fall session projected to be fairly good.

What Businesses are Selling?

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Hot Business List ~ June 2013

July 11, 2013

Below you will find the current “hot†business list courtesy of data from Businesses For Sale. We have information from  Businesses For Sale for a monthly ranking of business types based on the number of “hits†on their site. This ranking is not based on the actual sale of businesses.  If you have a business for sale in Orange County or are considering selling your business for sale in Orange County,  this information might be helpful.

Top Ten Businesses for June 2013:

  1. Convenience Stores
  2. Fast Food – Non Franchises
  3. Restaurants
  4. Bars
  5. Websites
  6. Gas/Petrol Service Stations
  7. Auto Repair, Service & Parts
  8. Delicatessens
  9. Café Bars
  10. Printing & Typesetting Services

Top Ten M&A Businesses for June 2013:

  1. Sandwich Shops & Delivery Businesses
  2. Liquor Stores/Off Licences/Wine Merchants Businesses
  3. Auto Repair, Service & Parts Businesses
  4. Bakers & Confectioners
  5. Distribution Businesses
  6. Oil & Petrochemical Related Businesses
  7. E-Commerce Businesses
  8. Supermarkets
  9. Pubs
  10. Web Design/Development Businesses

First Half Results are In

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In an effort to keep you up to date on the state of the market for buying and selling a business in Orange County or the rest of the county , I am sharing information from a couple of reports which give us an interesting insight to the market.   Bizbuysell, a prominent website for listing businesses for sale, reports a significant spike in small business sales for the second straight quarter.  Forbes reports Private Companies forecast strong revenue growth.  Axial (which tracks larger enterprise value transactions)  forecasts for the balance 2013  are very optimistic.  In my opinion, this tells us the climate for selling or buying a business has improved and is moving in the right direction.

Buying or Selling a Business: The External View

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There is the oft-told story about Ray Kroc, the founder of McDonalds. Before he approached the McDonald brothers at their California hamburger restaurant, he spent quite a few days sitting in his car watching the business. Only when he was convinced that the business and the concept worked, did he make an offer that the brothers could not refuse. The rest, as they say, is history.

The point, however, for both buyer and seller, is that it is important for both to sit across the proverbial street and watch the business. Buyers will get a lot of important information. For example, the buyer will learn about the customer base. How many customers does the business serve? How often? When are customers served? What is the make-up of the customer base? What are the busy days and times?

The owner, as well, can sometimes gain new insights on his or her business by taking a look at the business from the perspective of a potential seller, by taking an “across the street look.â€

Both owners and potential buyers can learn about the customer service, etc., by having a family member or close friend patronize the business.

Interestingly, these methods are now being used by business owners, franchisors and others. When used by these people, they are called mystery shoppers. They are increasingly being used by franchisors to check their franchisees on customer service and other operations of the business. Potential sellers might also want to have this service performed prior to putting their business up for sale.

 

What Would Your Business Sell For?

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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.

When his youngest son graduated as a CPA, he was appalled by his father’s primitive bookkeeping system. “I don’t know how you can run a business that way,†his son said. “How do you know what your profits are?â€

“Well, son,†the father replied, “when I came to this country, I had nothing but the clothes I was wearing. Today, your brother is a doctor, your sister is a lawyer, and you are an accountant. Your mother and I have a nice car, a city house and a place at the beach. We have a good business and everything is paid for. Add that all together, subtract the clothes, and there’s your profit.â€

A commonly accepted method to price a small business is to use Seller’s Discretionary Earnings (SDE). The International Business Brokers Association (IBBA) defines SDE as follows:

Discretionary Earnings – The earnings of a business enterprise prior to the following items:

  • income taxes

  • nonrecurring income and expenses

  • non-operating income and expenses

  • depreciation and amortization

  • interest expense or income

  • owner’s total compensation for one owner/operator, after adjusting the total compensation of all other owners to market value

Here are some terms as defined by the IBBA:

  • Owner’s salary – The salary or wages paid to the owner, including related payroll tax burden.

  • Owner’s total compensation – Total of owner’s salary and perquisites.

  • Perquisites – Expenses incurred at the discretion of the owner which are unnecessary to the continued operation of the business.

Developing a Multiplier

Once the SDE has been calculated, a multiplier has to be developed. The following (just as a guideline) should be rated from 0 to 5 with 5 being the highest. For example, if the business is a highly desirable business in the current market, “desirability†would be rated a 4 or 5. If the business is in an industry that is quickly declining or nearly obsolete, “industry†would be given a 0 or 1 rating.

Age: Number of years the seller has owned and operated the business.

  • Terms: Is the seller willing to offer terms?  For example, will the seller accept 40 percent as a down payment with the seller carrying back 60 percent at terms the business can afford while still providing a living for the buyer?
  • Competition: Consider the local market.
  • Risk: Is the business itself risky?
  • Growth trend of the business: Is it up or down?
  • Location/Facilities
  • Desirability: How popular is the business in the current market?
  • Industry: Is the industry itself declining or growing?
  • Type of business: Is the business type easily duplicated?

The average business sells for about 1.8 to 2.5. Obviously, if the SDE is solid and the multiple is above average, the price will be higher. Keep in mind that the price outlined includes all of the assets including fixtures and equipment, goodwill, etc. It does not include real estate or saleable inventory. The price determined above assumes that the business will be delivered to the buyer free and clear of any debt.

Veteran Wisdom

When all else fails, the words of a veteran business broker will work.

Asking Price is what the seller wants.

Selling Price is what the seller gets.

Fair Market Value is the highest price the buyer is willing to pay and the lowest price the seller is willing to accept.

Sellers should keep in mind that the actual price of a small business is about 80 percent of the seller’s asking price.

 

Burnout: One of the Top Reasons for Selling a Business

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Burnout is one of the main reasons mentioned by owners 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.

A business owner can experience burnout even with a business that’s successful and growing. Many independent business owners feel they’ve worked hard, made their money, and now is a good time to cash out and move on, before burnout endangers the health of the business.

The following warning signs should remind a business owner that cashing out beats burning out:

You are overwhelmed on a daily basis.

When a business owner is a one-man show, even small tasks and minor decisions can seem bigger than Mount Everest. These owners have been shouldering the burden alone for too long, and the isolation has taken its toll.

You sense a failure of imagination.

Burnt-out owners are so close to their work that they lose perspective. Prioritizing becomes a major daily challenge, and problem solving sometimes goes no further than the application of business Band-Aids that cost money in the long run rather than increasing profits.

The fun is gone.

Although owning a business is hard work, it should also provide a good measure of enjoyment. When the work day begins with dread or boredom, the owner probably needs a change of scenery and a new challenge.

You are simply worn out.

Being “just too tired†is a complaint heard just as often from the owner of the successful business as from the business that’s struggling to survive. In fact, a business that is growing will create increased demands of time and energy.

No matter what the status of the operation, the sheer work of keeping a business going day after day, year after year, is enough to encourage a business owner to make a change. This kind of schedule is not for everyone; in fact, statistics show that it’s hardly for anyone on a long-term basis.

How Long Does It Take to Sell a Business?

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Recent studies indicate that it now takes, on average, about eight to ten months to sell a small business. This figure seems to increase yearly. Why does it take so long to sell a business?

Price and terms are the biggest reasons!  It is very important not to overprice the business at the beginning of the sales process. A business will also sell more quickly if there is a reasonable down payment with the seller carrying the balance.  Having all of the necessary information right from the beginning can also greatly reduce the time period.  Finally, being prepared for the information a buyer may want to review or having the answers available for the questions a buyer may want answered is another key.

Here is the basic information a prospective acquirer will want to review and a seller should have prepared to help facilitate a quicker sale:

Copies of the financials for the past three years.

A copy of the lease and any assignments of the lease from previous sales.

A list of the fixtures and equipment that will be included in the sale. Note: If something is not included in the sale, it is best to remove it from the premises prior to the sale or at least have a list that specifies which items are not included.

A copy of the franchise agreement, if applicable, or any agreements with suppliers or vendors.

Copies of any other documentation pertaining to the business.

Supporting documents for patents, copyrights, trademarks, etc.

Sales brochures, press releases, advertisements, menus or other sales materials.

In addition, here are some key questions that buyers may likely ask.  A prepared seller should have ready answers and information to support those answers.

Is the seller willing to train a new owner at no charge?

Are there any zoning or local restrictions that would impact the business?

Is there any pending litigation?

Are any license issues involved?

Are there any federal or state requirements, or environmental OSHA issues that could affect the business?

What about the employee situation? Are there key employees?

Are there any copyrights, secret recipes, mailing lists, etc?

What about major suppliers or vendors?

A prepared seller is a willing seller, and having the answers to the above items can significantly reduce the time it takes to sell a business.

Using the services of a professional business broker can also greatly reduce the time period.  Business brokers are knowledgeable about the current market, they know how to market a business, and they can advise a seller on price and terms.  They can also recommend professional advisors if a seller doesn’t have them already.  Using advisors who are transaction experienced can also shorten the time it takes to close the sale.

When to Create an Exit Strategy

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There is the old saying that the time to develop an exit strategy is the day you open for business. Sounds good, but it’s not very realistic. Further, it also isn’t very optimistic. On the day you open for business, thoughts about how you get out of it aren’t pleasant, or helpful, thoughts. However, as you get the business to a place where you have a bit of extra time to plan, you will find that the things you need to do to improve your business are some of the very things you will need to work on to plan an exit strategy.

You can’t predict misfortune, but you can plan for it. One never knows when an accident or illness will force one to sell. When the drive to your business becomes filled with dread, maybe it’s time to consider selling. The following ideas will improve your business, even if you’re not currently considering selling. Dealing with these areas will also supply the information a buyer will most likely be looking at when the time does come to sell.

Buyers want cash flow.

This, at least on the surface, is the thing a potential buyer will want to look at.

Appearances are important.

You may think everything about the business looks fine, but the two letters on the neon sign that don’t work indicate to a possible buyer that the seller may have lost interest in the business, causing them to also wonder what else doesn’t work or has been neglected.

There is probably more value than you think.

Business owners often don’t look at things that do create real value such as: customer lists, secret recipes, specialized computer systems, programs, customer loyalty programs, etc.

Eliminate the surprises.

Make sure the lease is transferable and that your landlord is willing to cooperate.  Resolve that issue with town hall.  Resolve the problem with that angry customer. Minor problems and issues will often raise their ugly heads during sensitive times, spooking a possible buyer. So, the time to resolve them is before going to market.

Advantages of Buying an Existing Business

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Photo Credit: morebyless via Compfight cc

Photo Credit: morebyless via Compfight cc

1. Established.

An existing business is a known entity. It has an established and historical track record. It has a customer or client base, established vendors, and suppliers. It has a physical location and has furniture, fixtures, and equipment all in place.  The term “turnkey operation†is overused, but an existing business is just that, plus everything else. New franchises may offer a so-called turnkey business, but it ends there. Start-ups are starting from scratch.

2. Business Relationships. 

In addition to the existing relationships with customers or clients, vendors, and suppliers, most businesses also have experienced employees who are a valuable asset. Buyers may already have established relationships with banks, insurance companies, printers, advertisers, professional advisors, etc., but if not, the existing owner does have these relationships, and they can readily be transferred.

3. Not “A Pig in a Pokeâ€. 

Starting a new business is just that: “a pig in a poke.†No matter how much research, time, and money are invested, there is still a big risk in starting a business from scratch.  The existing business has a financial track record and established policies and procedures. A prospective buyer can see the financial history of the business — when sales are the highest and lowest, what the real expenses of the business are, how much money an owner can make, etc. Also, in almost all cases, a seller is more than willing to stay to teach and work with the new owner — sometimes free of charge.

4. Price and Terms.  

The seller has everything in place. The business is in operation and a price is established. Opening a new business from scratch can be the proverbial “money pit.â€Â  When purchasing an established business, the buyer knows exactly what he or she is getting for his money. In most cases, the seller is also willing to take a reasonable down payment and then finance the balance of the purchase price.

5. The “Unwritten†Guarantee.

By financing the purchase price, the seller is saying that he or she is confident that the business will be able to pay its bills, support the new owner, plus make any required payments to the seller.