Business Brokerage Blog

This is a blog discussing the many intricacies associated with selling/buying a business.

Selling your Business—the Power of Analysis and Contribution

Posted by: Fernando Simo

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More often than not, as I go on a listing appointment, the seller looks at me with concerned eyes and makes the following/or similar statement:  “My business does not generate enough profit for me to sell it; I really cannot afford to sell for the price that I may get.”   This may be a wrong assumption solely based on the profitability of the business.

 First of all, the value of your assets, such furniture, fixtures and equipment (ff&e) may be enough to warrant a reasonable price and secondly, and most importantly, profit does not equal benefit.    Although your Net Income may be in the red, the (Owners) benefit generated by your business may be in the thousands of dollars.   I recently dealt with a seller whose profit and loss statement showed $50K worth of net losses, only to discover after analyzing the result of operations, that the real cash flow generated by the business was better than $150K.  There were the usual add backs, but one very unusual--$170K write off of bad debts—a significant amount of which was nonrecurring.  So what truly represents Owners Benefit?   Well, we take your net income and add back to it:

 

1.                  Owners Salaries.  Although a P&L expense, this is definitely a benefit to the buyer.

2.                  Personal Car Expenses.  Normally, owners write off all expenses associated with their car—including, but not limited to car insurance.

3.                  Other Benefits.  Health Insurance, Life Insurance charged to the business becomes a benefit to the buyer.

4.                  Depreciation and Amortization of costs.  These expenses are not cash expenses nor will they belong to the new owner.  As such, we add them back as a benefit.

5.                  Interest Expense.  The interest is normally associated with a seller’s loan.  Therefore, not an expense to the new owner.

6.                  Major Legal Fees.  Normally apply only to the seller are commonly non-recurring expenses.

 So, if you are thinking about selling your business, you may have a lot more value than you think.  A simple analysis may determine that your contribution to the bottom line may be greater than you expect.  Remember, the owners benefit times a multiplier (normally 2-3 times) may become a reasonable sales price/value for your business.

 

 

Should you want to know more about buying or selling a business in Central Florida, please contact Fernando Simo at 407-361-8886, email me at fsimo@tworld.com or please visit my webpage at www.bizbuyorsellflorida.com .


Buying a Business??--The Golden Years!!

Posted by: Fernando Simo

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As we move into the golden years, something happens to many of us (yes, it happened to me)—we want to become entrepreneurs!  I think that the need to protect the financial viability of the rest of our life, force us into thinking that the only way we can effectively do so is by investing in a business of our own.   Please, think it over.  More often than not, we lose a significant amount of our life savings, if not all of it.  We foolishly use our 401K, the equity in our homes, etc. to fulfill the entrepreneurial dream: Financial Security and independence.

So, here is my two cents on this subject.    

1.                  Experience.  Please do not buy a business unless you do have some level of experience running this business. 

2.                  Investment.  Your total investment should be less than 20% of the amount you have in savings.  If you must borrow from a commercial bank or any other source, stay away from personal guarantees—easier said than done!

3.                  Business Model.  The easier the business model, the greater your chances of success.  Stay away from complicated models, such as restaurants, where you handle inventories, people issues, the health department, and a significant amount of overhead.  There are many businesses out there with low overhead and ease of management--Normally in the service industry.  Select those!!  By the way, although the business may be, a franchise system IS NOT a simple Business Model.   The only one benefiting from a franchise system is the franchisor.  The franchisees find themselves paying up to 10% of the net revenues of the company (royalties plus advertising and others) while struggling to make ends meet.

4.                  Run it.  Absentee ownership does not work.  If you must buy a business, make sure that you are the owner-operator of the business.   A business ran by an absentee owner may be losing money through understated revenues and inflated expenses.

5.                  Prepare a Financial Plan.  Know about the good, the bad and the ugly of the business.  Use assumptions indicating the best and worse outcomes and develop an exit strategy to get out of it.

6.                  Use Professional Advice.  Use lawyers to help you through the myriad of contracts and agreements you may sign and accountants/business consultants to help you decipher the financial requirements.    Additionally, get independent advice from a business broker prior to buying your business.

7.                  Work.  Are you willing to work 24/7?  As an owner, you may be required to do so.

As you enter into your golden years, you just may be happier getting the 5-10% earnings you may get from your investment savings.  Enough said.

Should you want to know more about buying or selling a business, please contact Fernando Simo at 407-361-8886, email me at fsimo@tworld.com or please visit my webpage at www.bizbuyorsellflorida.com .


Business Brokerage—HOW DO YOU KNOW WHEN TO SELL YOUR BUSINESS??

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During the week, I had a discussion with a very talented individual whose job is to help businesses “get well” financially through leadership development.  He asked for my opinion regarding valuation and exit strategies.   The essence of his question dealt with a topic in the mind of many-a-business:  when can I sell my business in order to get the most value? 

Now, I know that many of my colleagues may have their own answer to this question.  However, I gave him a very simple answer:  Treat your business as if you were either buying or selling stock.   Now, let’s not count those businesses which must sell for personal reasons, such as health problems; relocation requirements; moral or ethical issues; conflicts with partners or the BIG ONE; cash flow.   Those businesses, unfortunately, must sell at whatever price the market demands based on current business conditions and profitability.  No, I am talking about those businesses which began with an expectation/plan.

People buy stock because they expect a certain level of either growth (accumulation of equity) or earnings (Dividends).  Likewise, entrepreneurs enter into business opportunities after the development of financial forecast projecting the sales and earnings growth of the entity, given a certain Internal Rate of Return (IRR) —and in some cases, after a clear definition of an exit strategy.  So, they “buy” with an understanding of the risks/rewards associated with the opportunity.  So when should they sell?? 

Just like stock, these businesses should sell when the results of operations are significantly less than or more than expectations.  Depending on many factors, significant growth normally means a new concept/industry and, guess what?? major corporations normally look favorably to buying into and diversifying into growth markets. Sell it!!  If the results are significantly less than expected, sell it!!  Isn’t that what you would do if the stock falls by a specified percent?  If you do not, chances are that you will lose more in the long run.

So, treat the sale of your business as you would treat the sale of stock.  Yes, I know too simplistic, but true.

Should you want to know more about buying or selling a business, please contact Fernando Simo at 407-361-8886, email me at fsimo@tworld.com or please visit my webpage at www.bizbuyorsellflorida.com .


Ok, so what in the heck do Business Brokers do to EARN a living??  I really think that very few people truly understand how they add value to the process of selling or buying a business.   Although brokers help sellers value their business; structure it for sale; market it (confidentially) for sale; coach buyers; show their business; qualify buyers for financial capability to buy the business and, conduct most of the negotiations.  Our job really begins when the buyer makes an offer.

When a buyer makes an offer, we prepare a Purchase Agreement for his review and signature.  The agreement is normally a seven (7) pages long and includes more than twenty-five (25) different clauses dealing with the transaction—all of which must be explained and accepted to not only the buyer, but to the seller.  The seller normally has a couple of days to accept/reject the offer.  And if you think this is an easy process, think again.  Through the counter-offer process, it may take days, if not weeks, prior to a resolution and concurrence with all of the clauses within a Purchase Agreement.  Now, put yourself in the “Twilight Zone,” and imagine going through this process with two foreign nationals who barely know how to speak English…ouchh!!  And who is in the middle?  You guessed it, yours truly -- the Business Broker!!

Most Purchase Agreements include two major clauses:  A Due Diligence clause giving the buyer the ability to review all records, financials, etc. for a period of ten to fifteen days, and a Lease Contingency.   Both of these clauses are potential deal breakers which the Business Broker must control.

During Due Diligence, the brokers deal with attorneys and CPAs who question and ask for everything—sometimes ridiculous things.  For example, I recently was asked by a lawyer for a list of 50 things to review on a due diligence for a business worth $50K.  I went back to him and politely asked him to back off.  Expectations can often be somewhat unrealistic.   What makes the job most difficult is that most businesses DO NOT keep good records and often cannot find the required documentation.  And, of course, we have to deal with the most feared animal of all:  THE LANDLORD!

The Lease Contingency basically says that if the buyer cannot get a lease all bets are off.  So the business broker deals with landlords for either an assignment of or a new lease for the buyer.  Simple, right??  Not really, the buyer must first be approved by the landlord and the landlord has no motivation to provide either an assignment or a new lease to the buyer—he already has someone (the seller) paying the rent. So, he shares all the risks and nothing to gain.  So, who negotiates most deals???  You guessed it – the Business Broker!!

And then, the Closing….but that merits a blog all by itself.  Do business brokers earn their commission?  You tell me!!

Should you want to know more about buying or selling a business, please contact Fernando Simo at 407-361-8886, email me at fsimo@tworld.com or please visit my webpage at www.bizbuyorsellflorida.com .

 


Selling your Business??—ARE YOU “IN THE BOX?”

Posted by: Fernando Simo

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Last week I talked about the Selling Criteria or areas that can make your listing a lot more competitive, such as good financials, proper documentation (i.e.,lease and franchise agreements), equipment lists and others.   These are areas that brokers look into to determine how viable and competitive your listing is—looking for the probability of success.

During my discussion last week, I purposely omitted two additional elements (c’mon, I don’t want to tell you all in one week!!):  Price and Seller Financing.  I omitted them, because these two elements merit a separate discussion altogether.

Let’s address Price.  In our office, we use a terminology to define listings with the correct price structure—“In the Box.”  These are listings which appear to be within an appropriate market value.  In other words, if your type-business normally sells for a multiple of 2-3 times Owners Benefit (Net Profit plus owners salary, benefits, depreciation, interest and other miscellaneous additions) and yours is within those parameters—you are “IN THE BOX.”  That,  plus good financials and documentation would make the sale of your business almost a done deal—brokers like to deal with listings that are “In the Box.”

If your listing is not getting the activity that you would like, ask your broker if your listing is priced within the market.  Chances are that it will not be.  Price, like in residential real estate, is the main driver in determining how long your business will be in the market place.

Secondly, let’s talk about financing.  In a previous blog I mentioned that, in this economic environment, getting financing from lending institutions, such as the SBA or Commercial Banks has become increasingly difficult—although there are signs of improvements in this area.  So, if buyers cannot get financing through commercial banks, they cannot buy your business.   Seller financing, as mentioned before, has replaced much of the commercial banking lending.  What this means is that the degree of financing you provide, would be an indicator of how fast you will sell your business.  Today, as a rule of thumb, sellers should be looking at financing upwards of 50% of the transaction.   Additionally,  Buyers look upon this as a gesture of confidence in the business being sold—see my blog on why it makes sense to provide seller financing for more details.

So, before you beat up your business broker for the slow response on your listing, please determine if any of the above applies.  Trust me; you’ll be happier in the long run.

 

Should you want to know more about buying or selling a business, please contact Fernando Simo at 407-361-8886, email me at fsimo@tworld.com or please visit my webpage at www.bizbuyorsellflorida.com .


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Contact Us

 

Fernando A. Simo, P.A.
O: 407-992-8487
C:407-361-8886
fsimo@tworld.com

Testimonial

“Fernando is a go getter! If you want something done and done right, ask Fernando. He quickly became a leader in our industry and a heavy hitter here at Transworld. If you are considering selling or buying a business, Fernando is your best bet!!” June 28, 2009 .  Andrew Cagnetta, CEO and President of Transworld Business Brokers, LLC

I have known Mr. Simo for approximately 5 months.  I met Mr. Simo through Business Networks International, a highly professional business development organization.   Throughout his tenure, he has exemplified the utmost professionalism.I feel very comfortable recommending Mr. Simo as a great resource for your business brokerage needs.

Stephan Boehringer
TOLS Multimedia

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