Small Business Valuation - Doing a Business Valuation on the back of an envelop?

It may come as a surprise to learn just how many business brokers price small businesses for sale and business valuation is often written on the back of an envelop.

The business valuation method following is used by business brokers to determine an asking price for a small business; it is based on the adjusted net profit using the most recent profit and loss statements.

The business broker will look at all the business expenses to see what they can 'add back to profit'.  This is referred to as add backs or recasting.

The adjustment is made by adding back to the net profit all the non-essential or discretionary expenses, not necessary to run the business, to show a more accurate net cash flow for the owner.

The business may also have unaccountable expenses - in this case it would be adjusted down.  Once this number is determined, the next step is to get the envelope and pen then the business broker will multiply the adjusted net profit, usually by 2.5 times and they have an answer.

As you can plainly see, business valuation, using this method doesn’t make a great deal of sense and frequently has devastating results for small business buyers and sellers............but it is easy.


Some business brokers may even mention rule of thumb, but as one very wise business valuation practitioner suggests - 'thumbs come in many sizes'. 

The best thing to do is ensure you have a comprehensive small business valuation tool and step by step instuction for an accurate business valuation.

Selling a Small Business - What happens if the sale falls through?

Why your small business sale can fall through without warming.   Selling a small business yourself and what to do if the sale falls through.

Reducing the risk first and foremost -

1. One of the most important things you can do when selling a small business is establish the correct asking price in the first place.  9 out of 10 business owners have no idea what their business is worth 
2. Provide the business buyer and their advisors with a business valuation which gives details as to how you arrived at the price 
3. Show them why it's sound - you're taking the guess work out of it for them

This gives you the support you need to move the sale forward

It is extremely important to present your business in the correct manner to maximise your small business sale potential.

How to Sell a Small Business - Why you need a Small Business Selling Memorandum

A small business selling memorandum is also called an Information Memorandum and is used to present the business buyer with a overview of your small business.

It is a business selling tool, providing answers to some of the basic questions business buyers usually have concerning the business.
So what goes into an information memorandum?

• The history and purpose of the business
• Outline the offer
• Information about its customers and the products or services it provides
• Industry information
• Future plans
• Financial information

Your aim is to give the prospective business buyer enough information to make the next step, so don’t forget to include a call to action - What do you want them to do next?

Small Business Selling - Important points:

1. Always have the potential business buyers sign a Confidentiality Agreement
2. When you complete your Information Memorandum I would suggest you then create a summarised version.  This is then used as the first response to the buyer’s enquiry
3. Limit the information you reveal at the initial stage of the process until you qualify the business buyers

Selling Your Small Business - What Does a Business Broker Charge?

Selling your Small Business knowing the facts about Business Broker Charges -

Most business brokers will charge a commission to sell a business.  The selling fee (commission) is usually 10% of the sale price.  However, did you know, as a rule, business brokers will have a minimum fee on average - in the region of $10,000.  So you would be charged what ever is greater.

In addition a business broker will charge an upfront fee - sometimes called a listing fee - to sell your small business.


It’s normally a non refundable fee and is paid at the time of the business listing.  This fee is typical from $2,000 upwards.

Some business brokers may deduct the listing fee from the sale fee – that’s if they sell the business of course.  Let me give you an example...

...On a $200,000 business sale, listing fee of 2,000 Selling fee will be $20,000.  Commission due to the Business broker will be $22,000.  This will be due at settlement and is normally handled by the lawyer acting for the business owner.

The good news is, there's no need to pay these fees when you have the right information and accurate business valuation tool to sell your small business successfully.

Buying and Selling a Small Business - Why some Business Buyers will Never Buy a Business

The facts about some Business Buyers -
They’re looking for the perfect business.  It’s a case of paralyze by analyze.  Some business buyers just love looking at businesses - they will do lots of spreadsheets; they analyze every detail…it’s a hobby

They are not so much looking for the perfect business, but looking for the fault or the reason why they wouldn’t buy it.

It’s a common characteristic within particular occupations.  The business buyer may begin with the best intentions but lacks the motivation to keep looking and are not prepared to educate him or herself on the process.  Particular buyers have totally unrealistic expectations regarding the price of businesses and think they will buy a good business for nothing.

Some business buyers have very little idea what it means to own and operate a small business and it can come as a rude shock when they learn that most business owners work very hard put in long hours.  They are motivated to buy a business so they don’t have to work so hard , they have naive ideas.

Whether Small business buyers or sellers, they can be easily influenced -

Others who are opposed to the purchase of a business can influence buyers.  Common within family’s that have never experienced small business, they are worried they do not or cannot understand the need to be "your own boss” - transferring their own fears onto the buyer. 

Using a helpful resource such as the Bizbuy Kit or Bizsale Kit assists prospective business buyers and business sellers who need to know about buying and selling small business at the correct value.
 

How to Sell Your Business - Daydreaming about getting out of your business? Wonder how you would go about selling your business?

Do you find yourself thinking about getting out of your business and wonder how to go about it?

Selling your business /exit planning is a broad and complex topic.  No two situations are identical. 

The right exit plan depends on the business itself and the needs and wants of the business owner, however, no matter who you are or what circumstances you are in, this is one strategy that can be used by all business owners:

Do not procrastinate – Get started now.  I cannot emphasise this enough.  Even if you have only just started in your business, you ought to always run your business with one eye on the exit.  After all, you may not control your exit timing.  You may not even be around to manage the process.

However, lets assume you are and you plan on selling your business to retire.

The process of selling your business - Consider that some businesses may take a year or more to properly prepare for sale.  This can be due to the involved nature of them or the lack of prior planning and available information.

Keep in mind that to put a business on the market without the correct preparation can have disastrous consequences on the business valuation- sale price of the business.

Planning and knowledge of the process is crucial and business owners that are educated about the exit planning process will achieve the best outcome.

Start running your business with the end in mind.

For more information visit http://www.bizsalekits.com/.  There's a great little free book for business owners to get started on called 'Insider Tips for Selling a Business'