Unfortunately, sellers often ignore one very simple truth: The value of their business increases in direct proportion to the buyers’ decrease in risk.   I think this is a very important element of valuation and, as such, should be very well understood by those looking to sell or currently selling their businesses.   So, the less risk the more value you may be able to get for your business buyers will compete with price to get at your business. So, let us discuss some of the things that will make your business more valuable and less of a risk to buyers:

How would you like to buy a business using 401K funds--without any tax penalties? The purchase would leverage the government's taxable share of your 401K--therefore lowering your risk--and be effectively tax free on its operating profits. Should you want to know more, please contact me at 407-361-8886 or email me at fsimo@tworld.com. Also, please click here for more information on buying and selling a business in Orlando or Central Florida.

There is no doubt that a major topic of discussion (and concern) today for most of us is the economy.   One of the main issues regarding a market where unemployment nears ten (10) percent (or 20% for those who include workers who no longer submit claims or are simply working on a part-time basis, or simply gave up), is whether the recession and/or the recovery is underway. Based on two continuous GDP growth quarters, most economists would indicate that the recession is over—and has been since July 2009. Of course, many would argue that recovery without job creation is nothing but number crunching. In all of that confusion, I wanted to clarify what has been happening in the Business Brokerage world (in Florida) since July 2009. 

In one of my recent articles, I discussed profitability (Owners Benefit) as one of the key elements in determining a business valuation. I mentioned that if a business generate limited or no cash flow, it normally can only sell its tangible assets—receivables, inventories, furniture and fixtures and equipment.—for a nominal amount. Yes, you may get more than the book value, but I find it very rare. Unfortunately, over and over again, sellers come to me wanting to sell their business at a point of no return—where the business generates no profit or negative cash flow.

Believe me, I certainly can not be too critical of those sellers—I have been there. I know how hard it is to let go of a dream. However, that is precisely why I feel obligated to write this article. That’s why I recommend an Exit Strategy.

 As I go on listing appointments, I caution sellers that there are two ways in which one can normally value small businesses (notice the word “normally” and “small”). One way values Tangible Assets, such as inventories, receivables, furniture, fixtures and equipment. The other uses a multiple of Owners Benefit (Operating Profit plus owner’s salaries, depreciation, amortization, interest and personal benefits charged to the business). In other words, if your business generates minimal or no Owner’s Benefit, what you are really selling are the business’ tangible assets—what we business brokers call an Asset Sale or Sale of Assets--depending on which broker you talk to.  Before I get most of my colleagues upset, let me explain that by definition an Asset Sale normally includes some level of goodwill and normally represent about 90% of our sales, the other being a Stock Sale.  So, in this blog I am using the words Asset Sale loosely.  Having said that,  ordinarily, you would not be able to sell your business for an amount greater than the market value of those assets—market value is in the “eye of the beholder.”  However, buyers normally define Market Value at 20-30% of the assets’ original value--please notice I said "buyers." 

Like the majority of businesses, the recession has negatively impacted the Business Brokerage world. As the recession took hold on the economy and business revenues began to recede, so did business profits. With a reduction of over 30% in sales (turnover) for most businesses and fixed costs remaining in place (i.e., Insurance, Rent, Utilities), profits, value and cash flow suffered significantly from only a couple of years ago—most low cash flow businesses either closed doors or decided to sell. Most sellers found themselves selling at less than one third its original business value—just like in Real Estate, it became a “Buyer’s Market.” Note: Although business value can be determined in a variety of ways; i.e., multiple of sales, EBITDA, Owners Benefit, Free Cash Flow, etc.—most businesses sell at a multiple of 2-3 times Owners Benefit, where Owners Benefit closely resembles EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization.) Although one would think that buyers would greatly benefit from this recession, the recession had an impact on their ability to buy a business. With the failure of the financial markets and major banks, leveraging a business purchase became very difficult, indeed, due to the lack of financing availability. In normal economic times, one could purchase a business with 20% Equity and 80% Debt, normally based on a ten (10) year term. Although it is still possible to get this level of financing, the requirements have become a lot more stringent—requiring tax returns, financial statements, related business experience and much more. Additionally, the Small Business Administration (SBA), the financing source of most small business purchases, became a lot more stringent (and efficient) in providing loans. It recently revised their SOP (Standard Operating Procedure) 50-10 by more than 1000 pages requiring more business appraisals and third party asset valuations for loans of over $350,000. Furthermore, equity injection to buy a business can no longer come from home equity loans or any other form of personal credit. Additionally, their treatment of Goodwill has also changed by creating a Goodwill cap of 50% of the loan amount up to $250,000. As a result, sellers have taken on the financing burden. Today, sellers that want to sell their businesses quickly normally are required to finance up to 50% or more of the transaction. Although the world markets have suffered through this recession, the shrink in the dollar value has created opportunity for many foreigners to purchase business properties in the United States, while taking advantage of Visa permits. Note: Foreign investors who invest a substantial amount of capital in a US enterprise and who will develop and direct the enterprise, may apply for an E-2 Visa if their country of citizenship has the required treaty with the U.S. The holders of the E-2 Visa may reside in the United States as long as they continue to maintain their status with the enterprise. With the sterling latest surge over the dollar, many from the U.K bought (and continue to buy) businesses in the U.S., primarily looking for the E-2. Normally, these buyers go after “cash cow” businesses such as low overhead Service Businesses which required minimal capital investment in fixed assets—such as Property Management, Lawn and Pool Services, and Painting services. In summary, poor business valuations means poor sales prices which means low commissions for brokers. Likewise, buyer’s confidence in the market place and their inability to obtain financing creates less of an opportunity for a business sale, therefore, less commissions. The recession has had a very negative impact on the selling/buying of businesses and as such, Business Brokers’ have suffered accordingly. Those who survive the recession will be positioned to ripe all the benefits associated with the principle of supply and demand.  I intend on being one of them!!!!!!!

Should you want to know more about what it takes to sell your business, please call me, Fernando Simo, at 407-361-8886, or email me at fsimo@tworld.com. Also, please visit my webpage: bizbuyorsellflorida.com.

As a Business Broker, I often discuss the intrinsic value of good financials. You would be surprised how many businesses do not maintain good records; understate the reported income in tax returns; overstate expenses and hide (do not report) most of the cash generated by the business. As a result, many sellers, when it comes time for Due Diligence, cannot effectively sell their businesses because they cannot prove what the business REALLY generates in bottom line profitability. Using taxes and/or financial records as a guideline for valuation, this means that your business will be undervalued significantly and you may have to sell it thousands of dollars below its real value. So, if you and your business have an exit strategy--don't cheat and keep good financials. It will add significantly greater value to your bottom line than the few dollars you may save on taxes. Fruit for thought... Should you want to know more about what it takes to sell your business, please call me, Fernando Simo, at 407-361-8886, or email me at fsimo@tworld.com. Also, please visit my webpage: bizbuyorsellflorida.com.