Business buyers come in all varieties. Some want to talk about the business they are going to buy or they are looking at. Often these “buyers” never get beyond the talking phase. Others have a clearly defined boxes that they check off. Of course, there are the ones in-between that will know what they want when they see it.
The better question may actually be, what are sellers selling and what gives the business value.
The reason for buying an existing business over starting a new business from scratch is that clients, vendors, employees, etc. are in already in place. Their value is easier to calculate based on formulas and “rules of thumbs” developed for the specific business model by lenders and appraisers.
Business sellers are primarily selling three things; Fixed Assets, Cash Flow and Opportunity. Let’s look at each of these individually.
Fixed Assets: The fixed assets, often referred to as FFE or furniture, fixtures and equipment provides something tangible for the buyer. Banks also like to see some hard assets too. Generally, if the business selling price minus the current value of The FFE exceeds $250,000 it may trigger the need for a certified business appraisal. Sometimes a buyer can inject more cash to reduce this amount and avoid an appraisal. FFE seldom adds value to the business since most valuation books take the position that without the FFE the business would not be able to generate the cash flow which is the primary component of value for most businesses. Money for Inventory is usually calculated in the working capital needs of the business.
Cash Flow: The most important thing a business has to sell is cash flow. The cash flow is a primary driver of business valuations. It must be adequate to service the debt the buyer will need to take on to buy the business. There should also be enough cash to not only service the debt and provide an ROI to the buyer or income. Owner operators may have a great cash flow if they are debt free often giving them an unrealistic idea of how much money the business makes. Determining the actual cash flow from an owner operated business usually involves recasting or normalizing the financials to reflect the seller’s true benefit which often includes items paid for by the business that are not actually business related and non-cash items such as depreciation.
Opportunity: The important thing about opportunity is to identify what actual opportunities that the business has not yet explored. This is best reflected with actual business plans and three-year projections based on these plans. Lenders often require these plans and projections when processing a loan application. A Confidential Business Report (CBR) for a business that is for sale will usually contain both the plans and projections.
AEGIS Business Advisors provides Business Valuations for Most Likely Selling Price that can be a good place to start if you want to know the value of your business or one you are considering buying.
Richard Roberts is the Managing Broker at AEGIS Business Brokers, LLC
He is an active member of the IBBA International Business Brokers Association where he holds their top rating of CBI Certified Business Intermediary and the ABBA American Business Broker Association where he received his ABI Accredited Business Intermediary & SVA Senior Valuation Analyst Certifications.
You can reach Richard at email@example.com or 479.689.4455 Ext 11