All posts by Valuation Professional

Sellers – How to Establish True Value for Your Business

It took blood, sweat and tears to build the business you’ve created, but how much is it worth to someone else - for instance, a prospective buyer?

As a seller you need to determine what your business is worth and which valuation method makes sense for your situation. Exodus Business Solutions understands the differences and how to apply them to your specific industrial sector.

Asset valuation method

Add the value of your assets and subtract your liabilities to calculate how much your business would be worth if it were to be sold today. This method does not take into account any future earnings potential or any intangible value, such as the goodwill of the business. Goodwill may or may not be transferred along with new business ownership. Goodwill might include the business location or the owner’s personal reputation, or a special relationship with customers. An underperforming business may not have goodwill, so net asset valuation might accurately reflect its value.

Capitalization of earnings or cash flow

The capitalization rate represents the rate of return a buyer would require on an investment when compared to the market rate for other investments that have comparable risks. A buyer would need to determine the annual earnings trend.

Gross income multipliers

When business expenditures are predictable or in a situation where the buyer intends to drastically cut expenses after a business sale, it can be reasonable to base the business value on a gross revenues multiplier. However, this method, along with using a capitalization rate, doesn’t take into account that businesses within the same industry may have differing profit margins, based on expenses.

Assets and Earnings Valuation

The IRS recommends this method, which bases a company’s value on both assets and historical earnings. After calculating the expected returns from your business assets, then compare this total with your historical earnings. If your annual earnings are higher than the return from your assets, the difference is your excess earnings, which can be divided by a capitalization rate.

Attracting the Right Buyer

There are generally four types of buyers in the marketplace and it’s important to consider their motivations for acquiring your business.

Strategic buyers usually are interested in investing in larger businesses, often with revenues over $20 million, and are often attracted to entering new markets that offer new technologies, proprietary processes or products. Most small businesses don’t meet the criteria to attract these types of buyers who are focused on future earnings and market share.

Industry buyers often lack strategic or synergistic motivations for purchasing a business. Their goals are to locate and secure raw materials or products and negotiate the best possible price to benefit their company or organization.

Financial buyers often are interested in cash flow. They have money to invest, and are looking for a variety of different businesses within varying industries. If they don’t have the experience, they may need significant training and assistance from existing management after the sale, which should be reflected in the purchase price.

Corporate, or sophisticated, buyers are an attractive buyer for most businesses. They often take into account future earnings when assessing a company’s value. This financial information should be well-documented with credible and supportable assumptions to attract these types of buyers.

To receive a fair and accurate market value for your business, enlist the support of an expert in the field, like Exodus Business Solutions By hiring a professional to create a detailed valuation report, it demonstrates to potential buyers that you understand the market and your company’s true worth.

Contact Exodus Business Solutions at (619) 688-0007 or visit www.exodus1.com to get your questions answered and a business valuation started TODAY!

Buying A Business: What Price Should You Pay for It?

If you’re interested in purchasing an existing business, it can be difficult to determine how much the business is really worth. The process is part-art and part-science, and there are several methods which may be used to arrive at a company’s purchase price.

Asset-based Valuation
One of the most common methods to determine a businesses value is to add up its assets, and subtract its liabilities using the fair market value standard. Assets would include any intellectual property items, key customers’ contracts, and any strategic partnership agreements. Don’t overlook any unrecorded liabilities, which may include any pending legal issues, environmental compliance costs and property and income taxes.

This method does not take into account any future earnings potential or any intangible value, such as the goodwill of the business ... another common asset-based method is capitalized excess earnings, which accounts for both tangible and intangible assets.

Market-based Valuation
Market based valuation methods rely on pricing multiples, which calculate a company’s financial performance, including its revenues and profits, and its potential selling price. This method is commonly employed by buyers and their advisors to calculate a company’s worth. Comparison data - "comparables", based on sales of businesses similar to the business you are interested in buying, is also analyzed. This requires that the data is carefully selected and scrutinized and offers consistent data reporting standards.

Income-based Valuation
The bottom line for most buyers is how much income this business could generate for them. An income valuation approach factors in the risk and rate of return on the investment, based on capitalization and discounting. The capitalization rate represents the anticipated long-term growth rate subtracted from the discount rate. If a company’s earnings vary significantly from year to year, using the discount rate is often the better way to find the business valuation. The discount rate represents the rate of return necessary each year to make this business venture worth the investment. The business purchase price is compared against the annual return of other safer investments.

There are other factors to consider when attempting to determine a businesses’ value, and having a valuation prepared by an expert will lend credibility to your offer.

Determining the value of a business is just the beginning ... let the professionals at Exodus Business Solutions help guide you through the process to make your dream of business ownership a reality!

How To Buy A Business

Sometimes entrepreneurs ask us how to buy a business. We tell them the best way is to enlist the help of a professional service to help you with the transaction. Below are some of the checklist items we discuss with our clients.

Review their financial documents. Determine how much cash flow you can expect in the near term after giving yourself a modest salary. Divide the cash flow by your cash investment to get your return on investment. Is the ROI acceptable for your perceived risk? If it is, make an offer. Rely on the process work and you’ll find the business that’s right for you.

Get expert advice – It’s always a good idea to speak to an accountant and a lawyer, before you buy a business. For instance, you may want to make sure the seller cannot open another similar business just around the corner. Don’t forget, mistakes made now may come back to haunt you in the future. Get advice about issues such as:
•  The expected return on invested capital.
•  Valuation of stock and work in progress.
•  Inspection of the seller’s accounts, tax returns, wages books, and any statements that must be given under the law, etc.
•  Find out why is the business being sold – Sellers will offer any number of apparently legitimate reasons to explain the sale of their business. But it is worth asking anyway, and attempting to judge how comfortable the seller is in releasing information. Sometimes the seller wants to sell the business for a reason that should discourage you from buying (eg it’s not making money!). Make sure an accountant looks at the business’ accounts.

• Determine what is a fair price – Usually a business that is a going concern is sold with a certain payment for “goodwill”. This is the price the buyer pays for the business’s “good name” that has been earned over the period of operation. An accountant can help you establish an appropriate figure for goodwill by examining the business’s financial accounts.

What are the sales prospects? Among other things, you should know:
• The sales figures for each month of the year.
• The profiles of buyers (eg their age, spending patterns).
• Who the suppliers are and what their relationship with the business is.
• What the stock figures are, including average costs and turnover.
• If the stock is realistically valued.
• Profits and expenses

Make sure the profit figures offered by the seller are analyzed by your accountant. For instance, it is important to know whether the business will generate enough profits to cover your financial needs and support your lifestyle. Make sure the seller’s figures presented as expenses are realistic and are also looked at by an accountant. For instance:

• Are the expenses listed in full?
• Are there hidden costs?
• What are the depreciation costs?
• Are there any cost increases likely in the future?
• What are the terms of the lease of premises?
• What is the cost of borrowings for the business?
• What is the business’s credit rating?
• What are the total costs of employees?
• What are the liabilities that will carry over with the sale?
• Are there likely to be any rental or leasing increases?
• Are there any outstanding maintenance costs that must be met?
• The assets – Make sure you understand what assets are included in the sale price. For instance:
• Are they priced at a fair value?
• What are the depreciation costs?
• What are the leasing costs?
• What is the cash flow?

Legal help – A lawyer can help with the following issues:
• Whether the business structure is suitable for your needs.
• Agreements with the seller to ensure they don’t compete in the same geographical area or the same market.
• The terms of the purchase agreement.
• Whether the purchase agreement should be subject to finance.
• Whether there should be a trial period built into the purchase agreement.
• Looking at existing leasing agreements.
• Whether the purchase agreement says what you think it does.
• Searching the council and other agency records to ensure there are no plans or council orders that could disrupt the business or lead to a drop in sales.
• Checking the zoning regulations.
• Drafting any restraint of trade requirements of the seller, including dealing with prior customers and conducting a similar business.
• Transfer of business names, trademarks, etc.
• Information to be supplied by the seller (eg a list of current customers and suppliers).
• Any agreement for the seller to work in the business for any length of time.
• Any specific requirements of legislation

Let an Exodus Business Solutions professional help you find the most appropriate business opportunity. Click here to learn more.

Small Business for Sale

Being one of the leading firms in our industry, we are best equipped to help you because of our background and years of experience in working with business buyers and businesses of all sizes and types. This includes retail shops, restaurants, franchises, service businesses like distributing and printing, all kinds of manufacturing, laundries and many others Exodus Business Solutions can help you find just the right small business for sale.

Helping Buyers Find the Right Choice

If you need some assistance or advice in reviewing a listing, formulating an offer; negotiating a certain part of the deal, investigating or valuing a particular business, reviewing the financials, or if you simply want an unbiased expert opinion about a particular situation where you’re not positive what strategy to use, we will immediately provide you with our experienced input and assessment.

Your business purchase or sale information will be handled by experts and conducted in a confidential manner. We aim to help these buyers find a business quickly and efficiently.

With this service you’ll have immediate and unlimited access to our team of business buying specialists to help you with situations or challenges you encounter. Our experience extends across a wide variety of industries and company size including manufacturing, distribution, retail, medical (hospital-based, primary care, internal medicine, surgical, other medical specialties & dentistry), financial services-broker/dealers, investment advisors, financial planning, and architectural, engineering, accounting, legal, and other professional firms, hi-tech and non-technical firms.

If you want to go about this the right way, these are the four critical steps you must follow:

• Step 1 – Educate and prepare yourself fully for each stage of the buying process.
• Step 2 – Determine with absolute certainty what type of business is right for you and then focus your search strictly on businesses that make sense.
• Step 3 – Negotiate all of the details to ensure that you put together a deal that makes sense today and down the road.
• Step 4 – Investigate every aspect of the business for sale, the industry, the customers, the financials, the suppliers, the employees and the competition to be sure that you learn everything before you buy!?

Let an Exodus Business Solutions professional help you find the most appropriate business opportunity. Click here to learn more.

Businesses Wanted and Investment Opportunities

Among all of the companies for sale there are a few most wanted business opportunities. We are well equipped to help you because of our experience in buying and selling companies representing many different industries.

Don’t make a choice without examining the many choices, and learn from others what is popular and why. When you have the right information, it’s easy to make good decisions.

Most Wanted – The following is a list of some of the most wanted types of businesses in California.

• Retail
• Professional services
• Manufacturing
• Other types of goods & services
• Home based opportunities
• Distributorships

Here is more information on the most popular business opportunities that are in demand and most wanted by buyers.
• Visible and popular and have high re-sale
• Franchises
• Mom & pop
• Reoccurring revenue
• Easy to maintain

The four hallmarks of a good business:

• Many customers or clients – A point that is obvious in retail businesses, but also true in business to business … if a company is too dependent on a few or especially just one client, this may put the business at risk during shifts in the marketplace.
• Profitable – No amount of revenue will make up for a company that continues to operate in the red. Eventually it catches up. A company must have consistent profit margins.
• Smooth operations – A business which is making you a good living may not be worth it if it is filled with day-to-day headaches. Owners prefer smooth, trouble-free operations.
• Low debt – Some debt may be inevitable in today’s business climate, however, debt load must be manageable, and preferably light so as not to hurt the health of the company.

Let an Exodus Business Solutions professional help you find the most appropriate business opportunity. Click here to learn more.

How to Sell a Business

If you are a business owner considering your options, you may be in the stage of determining how to sell a business. Being one of the areas leading firms in the industry, we are well equipped to help you with your questions. Your business information will be handled by experts and conducted in a confidential manner. Below is an outline of some of the issues you should expect when selling your business.

The Many Aspects of Preparing to Sell

Even if you think you’re many years away from selling out, you should consider what your heirs or successors would have to do if you died unexpectedly. If you don’t have a workable exit strategy in place, you (or your heirs) may have no choice but to liquidate the business and sell off the assets piecemeal, getting nothing for the goodwill you’ve built up over the course of the years.

Initial issues in selling out – how should you time your decision and choose experts to help, and what legal/ethical pitfalls do you need to avoid?

Valuations of small businesses – how does the market put a price on a small business, and what can you do to maximize your own business’s value?

Finding a buyer – what do you need to know about working with a business broker, creating a selling memorandum, and other marketing concerns? If you work with us, we already have pre-qualified buyers, and one of the first steps in selling your business is to see if we have potential buyer matches in our database.

Tips during the listing process:

•Have up to date financial information available
•Prepare a current list of fixtures, equipment and inventory (if any)
•Maintain normal business hours
•Dress up the business premises
•Be prepared to negotiate
•Gather all of the information a buyer might like to review (see below)

Structuring the deal – what are your options as to terms, paying particular attention to the tax implications of various alternatives? For a brief recap, the following will need be reviewed by potential buyers:

•Financial information (including tax and liabilities)
•Premises and assets (condition, value, etc)
•Intellectual property (trademarks, copyrights, etc)
•Employees (roles, key members, etc)
•Management (effectiveness, etc)
•Products and services
•Customers (relations, reliability, etc)
•Suppliers (relations, cost, etc)
•Licenses and contracts (staff, leases, customers, etc)
•Sales and Marketing (methods, costs, success, etc)
•The industry itself (history, present and the future)
•You

Financing the deal – what should you know about seller financing, and third-party financing through leveraged buyouts?

Completing the deal – from the Letter of Intent through due diligence to the closing, what are the typical steps you can expect to go through in the sales process? When you sell the business, there are expenses in the selling process and you will not receive the exact amount that you sold it for. Below is a summary of what you can expect to receive (cash) from the sale. This is for guidance only as it will be different for everybody depending on what approach was employed to sell your business.

SELLING PRICE

(Less)
Cost of Solicitor
Cost of Accountant
Cost of Business Broker (can be high as 10% of the final sale price)
Any accounts payable
Payment of any outstanding loans, leases, contracts, etc
Cost of bringing the business up to speed (repairs, refurbishments, etc)

(Plus)
Prepaid rents, insurance, etc

(Equals) SELLERS EXPECTED PROCEEDS

After the sale – have a plan in place for what you plan to do with your life!

Let an Exodus Business Solutions professional help you with the sale of your business. Click here to learn more.

San Diego Business Broker

The goal of most entrepreneurs is to be successful, watch the bottom line, reduce the tax burden, and eventually sell their business for a premium. Unfortunately, most entrepreneurs will not end their career so illustriously. The fact is most business owners will not make the decision until its to late. According to the Small Business Administration, your business will transfer to family, be sold, or closed down. Statistics show that one out four of businesses will sell in the United States. The biggest reason businesses do not sell is because the ownership never made the decision.

Helping Businesses Make the Right Choice

Exodus Business Solutions specializes in preparing small and medium size businesses for sale and implementing a sophisticated sales effort to obtain a premium price for your business. By conducting a valuation and preparing a professional marketing package before marketing efforts begin, we quickly attract qualified buyers. Our experience proves, the valuation and marketing package facilitates buyer financing, a critical component of most business transaction.

We believe our business model will be the standard model for most business brokers and intermediaries in California. Buyers are becoming more sophisticated and expect the financial records to be compiled in a professional manner. This will limit the amount of time buyers spend gathering and examining company records and allow for smooth and timely transaction. Everyone wins under this scenario.

Buyer Profiles

The Industry Buyer is typically a competitor and knows your business, customers, and industry. Many times they stand to gain the most by acquiring your business, but as often as not they are among the lowest price bidders and buyers of last resort. They generally determine price based upon the value of the business assets. They are the best buyers when they have a strategic reason to buy and know that you know the reason. Our job at EBS is to know the strategic reason and to drive the price they pay above asset value

The Financial Buyer is typically an individual looking to be his own boss. They expect a living wage and take pride in building upon your success. Our experience indicates the majority of these individuals are hard working family types with excellent credit ratings. These buyers constitute the largest pool of buyers for the vast majority of US businesses that gross less than one million dollars a year. These businesses form the backbone of the US economy. EBS has access to a large pool of these Financial Buyers. These buyers typically base value on the company’s historical cash flow.

The Strategic Acquirer is generally a larger business that has identified a strategic reason to be in your business. They currently may or may not be a competitor. This buyer is our buyer of first choice as they pay the highest prices. However, we base our valuations upon what Industry, Financial, and Corporate Buyers will pay to avoid the distortion caused by Strategic Buyer methods

The Corporate Acquirer typically comes from a large company background. They include high net worth individuals or group of individuals, investor groups, and small corporations. They are usually familiar with your business and quite sophisticated. Their primary focus is on current and future earnings. EBS maintains a database with many of these corporate acquirers.

We love helping people prepare for the most important decision for their business. Doesn’t our careful approach make a lot more sense?

Small Business Opportunities

What is a small business? According to the SBA a small business concern is “one that is independently owned and operated and which is not dominant in its field of operation.” The law also states that in determining what constitutes a small business, the definition will vary from industry to industry to reflect industry differences accurately. But what opportunities are out there, and what are the pros and cons in the different types of businesses?.

Smart Entrepreneurs Make an Appropriate Choice

The number one question should be in choosing a business venture: “have I ever done this before?” Most successful businesses are a natural outgrowth of a previous position working in that industry, or by expanding a leisure pursuit into a paying enterprise. The best opportunities are sometimes right under our nose. Don’t think you have to fly all over the country when there are plenty of local opportunities to choose from. Here are some of the pros and cons of each type of endeavor:

Distribution – When it comes to getting goods from the thousands of product manufacturers into the hands of consumers worldwide, the role of wholesale distributor is a crucial one, because neither manufacturers nor the businesses that buy their products for resale could survive without them. Quite simply, distributors are middlemen. They buy products from manufacturers, then sell them to retailers at a profit. This type of business may allow for great flexibility, low inventory investment, and stability in changing market conditions.

Manufacturing – Manufacturing is defined as the making or processing a raw material into a finished product. The profits traditionally associated with manufacturing are very attractive, and for manufacturers who have carved out a niche for their products, the business may have a stable market window which lasts decades.

Professional services – The service industry in America is growing rapidly. Professional services are provided to both business and consumer markets and make up a large part of our economy. A services business might be a large insurance company, or just one individual. Marketing an intangible, such as a service may be a challenge for some people. As a professional service provider you may face special challenges promoting yourself to potential clients.

Retail Businesses – Over ½ of all of today’s workers consider opening a retail business during their lifetime. That sub shop or hardware store might look interesting from the outside, but lifelong retailers know that survival requires long hours, patient bankers, deep pockets, and boundless energy and determination in addition to keen financial skills and location, location, location. 4 out of 5 retailers discover the painful way that a lot of their hard work is mostly for their landlord. “To make a small fortune in retail, invest a large fortune” is the old joke.

Some Possible Advantages of Buying A Franchise

Turnkey System – A franchise system is a proven system for operating the business and generating profits. If your skills are weak in sales & marketing or operations then a turnkey franchise may be best.

Franchise Support – Small business owners often have very little support or lack a support team with business acumen. Buying a franchise offers the opportunity to share your challenges with other like-minded entrepreneurs. As franchise companies state, you’re in business for yourself, but not by yourself.

Lower Inventory Prices – The collective buying power of a franchise group allows for lower costs in purchasing inventory and equipment. Independent businesses usually have less bargaining power with suppliers.

Brand Name – The more established franchises provide a market awareness & brand name to franchisees. This can amount to great savings in customer acquisition costs and allow for more time in the operation of the business.

Easier Staff Recruiting – Finding good employees is a critical success factor for many independent small business owners. A franchise business with a recognized name will have greater recruiting pull than an unknown business entity.

Possible Downsides to Buying A Franchise

Less Freedom – Franchisees are required to share financial information and conform to uniform operating procedures. An independent business owner makes all the business decisions.

Higher Start-Up Costs – Buying a brand name franchise is often beyond the financial capability of many potential business owners. An independent business may be more realistic financially if the owner is willing to focus on building a strong business operation.

Royalties – Each and every year franchisees are required to make royalty payments in return for support in operations and advertising. Some franchisers may not provide all the necessary resources for the success of your particular location. Talk to other franchisees for feedback on the level of support they receive.

Broken Promises from Corporate – The franchiser may not have the ability to provide market or field support. Owners can become reactive and expect the head office to solve all the problems. In your own business, the only person you count on is you.

The buying a franchise option works best for individuals who work well in a team environment and have limited business & industry background. For others, the road to “true” entrepreneurship could represent the ideal path to business ownership. Take the time to consider your options. Buying a franchise may be right for you.

Business Brokers in California

Have you entertained the thought of buying a business or franchise or are you an owner looking to sell your business?

Business brokers, like real estate brokers, bring the buyers and sellers of businesses together. More business owners nationally choose to use a broker than to sell a business themselves, but some business owners do handle sales on their own. Try to use a business mergers and acquisitions specialist who focuses on business sales — in other words, avoid someone who does it part-time while selling real estate. A broker is an agent employed to effect bargains and contracts, as a middleman or negotiator, between other persons, for a compensation commonly called brokerage.

Finding the right business specialist is important if you are thinking about selling. Attention should be paid to success rates and experience, and determine how committed the professional is to selling your business. A business intermediary can bring more prospects to your business than you could ever do on your own. They’ll also separate the buyers from the lookers, which can save you valuable time. And, in most cases they will get you a better price than you could on your own — more than justifying the fees for service.

What type of professional should actually handle the sale?

What is your background/experience? It takes time and experience to be able to understand the nuances of businesses. The average Mergers and Acquisitions Specialist is 55, and for good reason. A competent professional needs experience in valuation, a fair amount of accounting experience, knowledge in the legal aspects of selling a business, salesmanship, and patience. In short, the firm or person you are looking for has been around the business block before entering the profession.

What services do you provide? – The M&A specialist should offer to help you price the business, and should be able to show you how to package and market your business. After you’ve heard two or three proposals, you’ll get a good idea of the type of services available to you. Remember you are hiring a sales professional with strong financial skills, so look for signs that your M&A specialist is just that.

Can I talk to the owner? – If you’re not personally dealing with the owner of the firm, it may be a good idea speak to him or her. Ask him or her the questions you asked of the person whom you initially contacted. Do you get the same answers? Also, ask what kind of recourse you have if you’re not getting any activity on your business.

What kinds of tools do you use to research buyers? Before the Internet, if you wanted to sell your business, you were probably stuck looking for buyers in your city or area. Today, the Internet has made the world smaller for sellers, and a good M&A specialist takes advantage of that. Additionally, the M&A specialist should have at his or her disposal research tools and use them to find buyers and general information about the profession or industry in which the seller is active.

How will you market the business? – Discovering what tools a firm has in its marketing arsenal will help you determine just how committed they are to selling. Every business needs a little different approach to its marketing campaign and every business brokerage firm is a little different, so there are many combinations of campaign strategies that might be appropriate.

Look for a variety of ways to that the broker reaches sellers – ads in local papers and trade publications, listings on Web sites as www.bizben.com. It’s also a good idea to get on the Internet yourself, act like a buyer, find out where listings for businesses similar to yours show up, and then ask the broker if they list there.

Ask to see the printed marketing materials the broker puts out for clients. Look at their brochures and presentations, assessing completeness and how well-written they are. Ask whether they approach similar or complementary businesses about mergers, which shows you they are casting a wide net for buyers.

There are many business brokers in California but Exodus Business Solutions can help you with their unique expertise to sell or buy a business in Southern California and beyond. At Exodus Business Solutions we can also help you price your business properly, tell you how you can make it more saleable, and simply be there as a resource throughout the sale.

For additional information call 619-688-0007

Business Valuation Formulas

Exodus Business Solutions can help you determine a fair and accurate valuation for your business.

The best results are produced by an in-depth analysis of many factors. Exodus is very experienced at assembling an accurate picture and executive summary. However, from time to time we are asked: “Isn’t there some kind of rule of thumb short formula for businesses?” The answer is that, yes there are short formulas, but these are generally inaccurate.

business-valuation-formula-list

 

Even though that is the case we are sharing with you what some people think are various rule of thumb valuation methods for specific types of businesses.