Business Brokerage Blog

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

Learn from those who lost it all—PERFORM A DUE DILIGENCE PRIOR TO CLOSING ON THE BUSINESS!!

Posted by: Fernando Simo

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It’s the same old story.  A buyer enters into a Purchase Agreement to buy a business, normally with a provision to conduct a due diligence within a 10-15 day period and, (guess what?)  fails to do so.  As a result, the buyer goes to closing, signs all of the documents required to transfer ownership only to find out later on that what he bought is not what he expected.  As a result, the new business owner losses, in most cases, all of their liquid assets.  It is a story which I find repeating all the time. 

Obviously, a due diligence should be performed to:
a. Confirm that the business is what it appears to be.
b. Identify potential “deal killer” defects in the business being acquired.
c. Gain information that may be useful in determining the viability of the business.
d. Verifying that the transaction complies with the investment or acquisition criteria—what you were told is, indeed, the truth.

Having said that, what should I look at?  Normally, for small transactions, the minimum you should be looking at are:

a. Current Payroll Information.  Are the payroll and employees what I have been told?
b. Lease Agreement.  This is important if you are looking to get a lease assignment.
c. Financial Statements – Balance Sheet and P&L.  Do they represent what I have been told?  Are they prepared by a reputable CPA firm?
d. Tax Returns
e. Bank Accounts—a good source to determine true cash flow.

So, PLEASE, do not make the mistake of ignoring the due diligence process.  It will provide you with the peace of mind of entering into a new business with a clear vision of its future.

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


WHY IT MAKES SENSE TO PROVIDE SELLER FINANCING IN THIS MARKET

Posted by: Fernando Simo

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Let’s face it, many buyers today are hindered by their ability to buy because banks are unwilling to provide business loans as easily as just a few years ago.  It is, to say the least, difficult to get financing.  As a result, seller financing have now replaced commercial banks to cover the gap.  In this market, if sellers fail to provide financing, they may not be able to sell their business, period!  Here are some reasons why sellers should provide financing:

1. Higher Interest Earnings.  In today’s market, your bank savings may generate between 2-4% interest earnings.  Seller financing normally is above 8%.


2. Buyers Become more Confident.  A buyer who knows you are willing to finance has a greater confidence level on the purchase of the business.


3. Generates More Potential Buyers.  Your market will increase by those buyers who need financing and cannot get it through the banks.


4. The Seller will not be Subordinate to a Bank.  Normally, SBA loans required a 10% subordination to their loan—until the loan has been repaid.


5. Less and Simpler Documentation.  Documents between buyer and seller are significantly less complex than with Banking Institutions.


6. Much Faster Closing.  Only the seller and buyer are involved.


7. Higher Buyer Qualification.                                                                                                                     

8. More Seller Control.  Normally, seller financing has as collateral the business assets.  So, in case of default, you may get your business back plus all the monies you have already received.


9. Higher Sales Price.  You may be able to increase the sell price of your business by 15-20% higher than those without seller financing.

So, if you are a seller, think about it.  It may be to your benefit.

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


THE RECESSION IMPACT ON THE BUSINESS BROKERAGE INDUSTRY

Posted by: Fernando Simo

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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.


The value of good Financial Records--DON'T CHEAT!!

Posted by: Fernando Simo

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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.


What is Your Business Worth??

Posted by: Fernando Simo

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Valuation certainly is one of the major concerns of sellers as they approach the decision to sell their business.  However, valuation is an art, not a science and in reality the real value of your business comes from the market or what a buyer is willing to pay.  However, generally, there are three generally accepted approaches to valuing a business.

1.    The Asset Approach. The value of the assets in your business minus the liabilities.  Using accounting terminology, one could label this as Book Value.  For the most part, this approach does not represent the true value of a business.
2.    The Market Approach.   Simply speaking this compares to the Real Estate comparables.  Like businesses in size and industry sell for similar valuations.
3.    The Income Approach.  This approach values your business as the present value of all of its future income streams—normally Free Cash Flow discounted at a weighted average cost of capital applicable to that business and or based on the level of debt/equity required.

And then, there are multiples.  Multiples of EBITDA, Owners Benefit—net income plus depreciation, interest, and the owners’ salary and fringe benefits.   And here again, multiples vary depending on many factors:  earning potential, the strength of financial records, potential growth of the company, etc.  However, for most businesses in this market, a multiple of 2-3 applied to Owners Benefit would value your business.

What if no earnings or little earning?  Well, then your business is worth its asset value (goodwill, inventories, receivables, equipment, etc.).  Sorry.

Confusing?  Yes, it is.  An art NOT  a science.

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


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

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“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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