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Documents and Information Required for Selling a Business

If you’re considering selling your business, it’s important to remember that prospective buyers are looking for clear, objective facts that will convince them that your business will be a profitable investment for them. Although they may initially be attracted to your business for other reasons, their primary interest will be the bottom line. This means that you need to provide them with comprehensive, organized documentation and solid bookkeeping that demonstrates the historical performance of your business and back up your asking price.

Preparing solid financials ahead of time will help determine a fair asking price, while giving you the opportunity to identify gaps or shortcomings.

In order to get started in making an accurate assessment of your business, you’ll need to prepare your financial statements, ideally, for the past two to three years. Hopefully you’ve been keeping your business records in order. If not, roll up your sleeves, gather your papers together and prepare to get organized well in advance of your listing. You’ll be glad you did, as this will make the selling process go much more smoothly.

To ensure the integrity of your financial records, it would be wise to seek the assistance of a small business CPA. A professional CPA can help you identify any gaps or shortcomings that could be improved. Moreover, buyers often place more weight on financials that have been scrutinized by a qualified accounting professional. Professionally audited financials often have more validity and the potential to increase your asking price.

Compile the following documents in preparation for your business sale:

  • Profit & loss statements for the current and past 2-3 years
  • Current balance sheet
  • Cash flow statement
  • Business tax returns for the past 2-3 years
  • Copy of the current lease
  • Insurance policies
  • Non-disclosure/confidentiality agreement
  • Personal financial statement for the buyer to complete
  • Executive summary of overview of the business
  • Detailed profile describing the business
  • Any additional documentation to substantiate the financial representations
  • Professional certificates
  • Supplier and distributor contracts
  • Employment agreements
  • Offer to purchase agreement
  • Note for any seller financing

Preparing your financials will help you develop improvement strategies and increase the value of your business.

Getting your financial records and reviewing them for accuracy will not only help you in determining a fair asking price, it will help you identify certain pitfalls and develop improvement strategies. Why not improve the value of your company now while keeping an eye towards future sales? Once your records are in order, you’ll have the means to determine and improve your earnings multiples. Price-to-earnings ratios are dependent on numerous factors, and adequate preparation will afford you the time to act to improve the value of your business.

This is also a good time to engage with a professional business broker. By developing a relationship with a business broker ahead of time, you’ll have the opportunity to learn what buyers are looking for, what’s in demand, and ways in which you can make your business more attractive and easier to sell. A business broker can also help you determine a fair asking price and the best time to market your business for sale.

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Buyers will expect to see certain documents that show your business is profitable and a good investment.

Taking the time to collect and organize the right documents will make your business more appealing to potential buyers. Solid documentation of a profitable history is perhaps the clearest way to illustrate the financial value of your business. Being prepared with an organized package of documents not only reflects well on you and your business, it will ward off unnecessary stress.

That being said, be aware that a buyer may request confidential information from you, such as customer lists or supplier contracts, which you may not be comfortable disclosing in the early stages of the transaction. Should this occur, it’s best to explain to the buyer why you feel uncomfortable; at the same time listening to their point of view. Keep in mind that they are researching their future investment, and you both want the transaction to go smoothly. If you are comfortable disclosing confidential information, be sure to have a signed NDA (Non-Disclosure Agreement) in place prior to doing so.

Comprehensive, organized record keeping, including strong financials, are a critical part of the sales process. By applying this practice ahead of time, you’re more likely to impress prospective buyers with a well-managed business and viable enterprise. At the same time, you’ll be able to develop strategies that will increase the value of your business, thus making it easier to sell for the full market value you deserve.

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6 Rules of Thumb for Business Valuation

When it comes time to buy or sell a business, it’s important to set your personal feelings aside in order to do an accurate business valuation and establish a realistic and competitive selling price. You’ll need to objectively analyze the business, study the current market, and consider employing the expertise of a professional business appraiser. So what are the rules of thumb for business valuation?

There are many acceptable business valuation methods. One may be more suitable than another, depending on the type of business being valued, including its industry, size and circumstances of sale.

1. Prepare the financial statements and determine the SDE.

The first rule of thumb for business valuation is preparing the company’s financial statements. The owner should gather the financial records for the past three years including: an income statement, a cash flow statement and a balance sheet. If the business hasn’t been operating for three years, consider using a projection model.

Next, work with an accountant to transform the income statement into a seller’s discretionary earnings (SDE) statement, which takes into account non-recurring purchases and discretionary expenses to more accurately reflect the value of your business.

2. Establish the asset value of the business.

The second rule of thumb for business valuation is to establish the asset value of the business. First, estimate the value of the company’s tangible assets by taking inventory of all the physical aspects of the business such as fixtures, equipment and inventory.

Next, estimate the value of the company’s intangible assets, including intellectual property, contracts, partnerships, brand recognition, and more. Assigning value to intangible assets can be tricky and it may be best to consult with a business broker or professional appraiser.

While asset valuation gives you a clearer picture of the business’s current value, it fails to clearly reflect the value of the company’s earning potential. Since buyers are primarily interested in their investment’s future earnings, it’s a good idea to quantify an estimate of the company’s earning potential through price multiples.

3. Use price multiples to estimate the value of the business.

Another valuation rule of thumb is using price multiples, which base the value of the business on a multiple of its potential earnings. Price multiples provide buyers with a tool to estimate their return on investment. They are a quick way to arrive at a general estimate of the business’s sale price.

Once you’ve established the asset valuation of the business, the next step is to determine the multiple that applies to the geographical region and type of industry. These numbers combine to form an equation that results in a fair estimate of the business’s sale price.

For example, nationally the average business sells for around 0.6 times its annual revenue. Once you’ve determined the annual revenue and found the correct multiplier, it becomes a simple matter of plugging the numbers in and then doing the math. The trick is to find the right multiplier for the business, since they can vary quite a bit.

4. Use comparables (or comps) of ‘For Sale’ and sold businesses.

Recent sales of comparable businesses (or ‘comps’) are a popular valuation rule of thumb that will offer you a realistic picture of what similar businesses are selling for. By identifying examples of similar businesses that have sold in the same area, you can get a better sense of a realistic selling price.

Comp data can be accessed through several online sources, as well as through business brokers, who can help to provide you with the right multiplier for your market. BizBuySell provides an inventory of over hundreds of thousands of successfully sold businesses and over 50,000 businesses listed for sale. You can narrow your search by industry and geographic location, and then narrow it further by gross income and cash flow.

5. Improve the value of the business.

f an owner is disappointed when they discover the estimated value of the business, there are many ways to improve it. In fact, the sooner the owner begins working on increasing the business’s selling price the better. Remember that buyers are interested in businesses that offer the greatest potential for future profit. Documentation of several years of profit growth will add value to the company.

Buyers are looking for an easy transition into their new business, so evidence that the business is well-organized and running smoothly will also add to the company’s value. A clean and well-oiled machine with a neat, organized package of detailed financial records, compliance with health and safety regulations, renewable leases, employee policies, staff with transferable contracts, supplier lists and an established client base will go a long way. Potential buyers will be impressed and more likely to feel the business is a good investment for them.

Seller financing is yet another way that owners can potentially improve the value of a business. Partially financing the sale can benefit the owner with a higher selling price, collected interest, and a wider field of potential buyers.

6. Consult with a professional appraiser and get a formal valuation.

Hiring a professional business appraiser not only allows you to benefit from his or her expertise, it provides the objectivity that you may lack when it comes to making a fair assessment of the business. Many brokers are experienced at conducting a formal valuation or have connections with qualified professionals. Valuing a business correctly is essential in a competitive market, and enlisting the help of a third party professional will not only eliminate seller sentiment from the sales process, it will also shorten it by aligning the business value with up-to-date market conditions

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Buying A Business? How to Decide the Best Business to Own

If you are in the market to buy a small business, it’s important to find a business that interests you, fits your lifestyle and lends itself to profitability. Before you begin your search, you must first define your buying criteria and develop a clear picture of what you’re looking for in a business. Be very specific on the type of business you’ll even consider. Otherwise, you can waste a lot of time looking at businesses that won’t work for you. Take the following things into consideration when making this life decision:

1. Determine Your Lifestyle Needs

The best business for your best friend may not be the best business for you and your personal lifestyle goals. Do you want this business to be a side-hustle that takes up your evenings or will this business be central to your livelihood?

How much involvement would you like to have in the day-to-day operations? You can be very present in the day-to-day operations as an active investor or choose to be more hands-off as a passive investor by hiring people to run your business.

Will your business be a small “lifestyle” venture that supports your family only or will you grow it into a behemoth empire with an IPO on the horizon? Will this business complement or augment an existing business you own?

There are business models that work well for each type of business and lifestyle objective, so you’ll want to choose one that fits your preference accordingly.

No one can answer these questions but you. Once you are able to pin down your lifestyle preferences, you’ll be in a good place to find the ideal business to purchase.

2. Define Your Skills and Strengths

If you’ll be buying a business, you should know exactly where you will fit into the equation. If you will be enhancing a business you’ll buy, you should know how you’ll do that. You might be excellent at marketing or computer programmer. How could that strength fit into the business you’ll buy?

Let’s say you are looking at a karate gym that has no problem attracting customers and generating revenue, but you notice the owner has a problem with keeping good records or getting repeat business. If either of these business deficiencies is your forte, it may be an opportunity to add value to the business asset.

On the flip side, a business that needs a strong management presence would not be ideal if you’ll be a passive investor or not willing to hire top-notch management personnel. The point here is finding a business where your knowledge and expertise will add value and equity to the business.

3. Determine Your Industry and Target Market

Once you pin down your strengths, you’ll want to research your preferred industry or niche. Certain businesses will thrive under very specific conditions, while others will tank. A fancy pet grooming shop in a working-class community may not be a good fit, just as a pool construction company in a cold-weather climate may not do well.

Understand the likelihood of capturing market share in a given industry based on current market conditions. You’ll also need to research market dynamics (like a changing neighborhood or regulations) along with impacts they could have on your business.

Finally, consider where your strengths and passions lay when choosing an industry. If your passion is growing revenue, a “boring” lampshade manufacturing outfit could do. If you’re looking at buying a rock-climbing gear store without much knowledge or passion, make sure you understand how you’ll remain interested and bring improvement to that business.

4. Select Your Location

These days, you can find a business almost anywhere with the help of technology. However, you’ve got to know the locations where you will be comfortable operating your business. Are you planning to relocate? If not, you’ll likely want something local. If you will be a passive investor or are considering a digital business model, location may not matter much.

Also, the industry you choose may also have a bearing on the location. There are some businesses that do well in some regions, but not so well in others. Take these points into consideration and select your location preferences so your buying criteria is specific enough.

5. Set Your Purchase Price and Terms

After you’ve pinned down all of this criteria, the last (or perhaps the first) determining factor will be purchase price and terms. You could find the perfect business right in line with your lifestyle and location preferences, but if you can’t afford it, none of that will matter. For this reason, you should have an idea of how much business you can afford from the outset.

However, just because a business is more expensive than you’re comfortable with doesn’t mean you can’t buy it. That’s where the terms come in. There are many buying arrangements you can make so that a business deal is feasible for your means. Research all your financing options thoroughly in order to see the best one for you.

For example, a business seller may offer seller financing or revenue sharing. There’s also the possibility of getting a bank loan to help with your acquisition.

Overall, you should be aware of both the price and terms that will work for you in the near term and long run.

6. Take Advantage of Technology

Now that you’ve created the picture of the ideal business you’ll buy, it’s time to start your search so you can make your decision on a business purchase sooner than later.

BizBuySell allows you to conduct very specific searches on thousands of businesses for sale. You can use advanced search filters to find listings based on characteristics like price, location, listing age and more.

Not only can BizBuySell help you find the best business to buy, the website is full of resources to help educate you through the process. If you’d like to know more about buying an existing business, check out the BizBuySell Guide to Buying a Small Business for more information.

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Evaluating a Business for Sale – What to Ask the Owner

One of the most important aspects of evaluating a business for sale is knowing what questions to ask the owner. As part of your preliminary due diligence, you’ve inquired about a number of businesses and created your ‘short list’ of a few top candidates. The next step is to delve deeper and speak directly to the person or team responsible for running the business for the past few years.

This first-hand information will clue you in on the real state of affairs when it comes to the business you’d like to purchase. Your questions should be specific and give you a complete picture as to how the business operates, how it generates revenue and how it makes money for the owner.

7 Questions to ask the owner when evaluating a business for sale:

1. Why Are You Selling This Business?

This is probably the most important question you’ll have to ask the current business owner. How they respond will direct the entire course of the buying process. It can kill the deal or even cause you to ask many more questions to get the real story behind what makes the business tick.

Common answers include wanting to cash out on built up equity or impending retirement. The owner may truly be retiring, but you’ll also want to look for red flags like a dwindling customer base or perhaps new regulations that can affect the profitability of a business.

Although you may believe the owner’s reason for selling, you should also assume there may be additional reasons the owner might not bring up. These reasons may not be a deal breaker, but if they exist, you should get into the habit of checking and double checking all the information you get from the seller of the business.

2. How Are You Being Compensated?

Another tough question to ask when buying a business is how the owner is being compensated. There may be more than one answer, but this is a very key question. If a business doesn’t have sufficient cash flow to support an owner and their family to make a reasonable living, is it really worth buying?

Remember, compensation may not be very straight forward. Owners may compensate themselves with a variety of cash draws, W-2 earnings and access to company resources.

It’s important to know exactly how the owner has benefited from the business. This will give you a general idea of the business financials which will further help you determine whether or not to place an offer on the business.

3. Do You Have Immediate Cash Flow?

When you purchase a business, you are buying earnings, which is the reason why you didn’t start a business from scratch. You’ve already determined that you don’t want to pour money into a venture only to wait five years to extract earnings and related cash flow.

However, if revenues are declining for some reason, you’ll want to know why. If revenues will be at $0 by the time your sale closes, you’ve effectively just purchased a business “lemon.” Look at cash flow patterns and ask the owner about the ebbs and flows of those patterns.

There can be very good reasons for decline in revenues like seasonality, illness or a shortage of supplies needed to fulfill orders. Get an explanation and check the accuracy of these claims so you can make any corrections should you decide to purchase the business.

4. What Are Your Biggest Business Challenges?

The answer here will be one of the most valuable pieces of information you can gather from a business owner. You may even want to phrase the question in a way that asks the seller what frustrates them the most. Here you’ll find out about the business’ biggest weaknesses and biggest opportunities.

The answer may either excite you or cause you to go in a completely different direction. Look for answers that confirm the narrative you need to hear to keep going with this opportunity. The owner may have reached their limit for growing the company. On the other hand, they may have some sort of weakness that turns out to be one your biggest strengths.

Circumstances outside the owner’s control like zoning changes or general industry decline should make you wary about facing the same challenges once you take over the business.

5. What Are Your Most Valuable Business Resources?

One way to find out if an acquisition will be successful is to ask the owner if the business for sale includes its existing resources, such as a skilled workforce. If the owner tells you about a key employee or vendor relationship that you will not inherit, this could be a problem.

You should even be aware of special certified designations that qualify the business owner for deals reserved especially for small business, women, minorities, disabled veterans, etc. If you won’t have access to these same resources or designations, it could mean difficulty for you when trying to duplicate the same level of success as the previous business owner

6. What is the Nature of Your Customer Base?

You’ll want to know if customers are individual consumers or large businesses, or even if there is any amount of government work. Are there just a few large, established customers or thousands of smaller customers that come and go? There are advantages and disadvantages to all kinds of customer characteristics, but it’s good to know ahead of time what to expect should you decide to purchase the business.

Furthermore, are these recurring customers or is each transaction a done deal? What does it cost to acquire a customer and what would be their lifetime value? These are just a few questions to ask so that you can drill down to a complete picture of the business customer base.

7. Who Are Your Major Competitors?

Finally, when evaluating a business for sale, you’ll want to get a pulse regarding market share, threats and competition. Ask the owner who their major competitors are and what areas they excel in. They may turn out to be one of the leaders in their industry.

Ask if the business has any advantages over its competitors, plus whether or not these competitors are direct or indirect (i.e. providing a similar service but not in direct competition?).

Spending time with the owner and getting answers to these questions will give you a much clearer picture what the business has to offer and whether or not the opportunity is worth pursuing further. For more details about the process of buying an existing business, you can download for free BizBuySell’s Guide to Buying a Small Business. To continue in your search for the best business to buy, visit BizBuySell, the Internet’s largest marketplace for buying and selling a small business.

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Three Professionals To Have On Your Team When Buying a Business

Buying a business is a big commitment and, while you may feel you’ve found the perfect company, you need a second or sometimes third set of eyes to look at it objectively and determine if it’s worth buying. Furthermore, you need a skilled professional to help evaluate the business and guide you through the transaction process. This usually requires expertise in not one, but many areas, including business valuation, acquisition, legal, and sometimes real estate.

1. A good attorney. Here’s why you need one:

  • A key component in buying a business is ensuring the transaction is done legally and properly. From contacting the owner and signing a non-disclosure agreement, to deciding on the structure of the purchase, nearly all documents should be reviewed by your attorney.
  • You will also need to decide who will be buying the business – you personally or your company? Or, will you be buying the assets or shares?
  • An experienced attorney will know what makes the best sense. Your attorney will also assist you in negotiating the purchase terms, the purchase and sale agreement, as well as any other details involved in transferring ownership.

How do you choose an attorney when buying a business?

  • When it comes to business acquisitions, your attorney’s input can have a strong impact on the outcome of the deal.
  • They should be experienced with small to mid-sized business acquisitions, the different types of business structure and how to protect you against any liabilities or tax obligations.
  • They should be able to guide you through due diligence, transferring permits and licenses. They should also know what documents need to be filed with the courts and how to deal with employees.
  • Depending on the transaction, it may also require the expertise of labor or tax, or real estate attorneys.
  • Before hiring any attorney, interview them, ask for references and check to ensure that no malpractice suits have been filed against them.

2. A sharp accountant. Here’s why you need one:

  • One of the most important things to consider about buying a business is its financial performance. Yet, many small businesses are not the best bookkeepers.
  • Additionally, their accounting methods focus on minimizing their taxes. As a result, their financials may not show much of a profit, or any profit.
  • An experienced account will review their financials and ask the owner specific questions about how they make their money.
  • An experienced account can help you determine the seller’s discretionary earnings (SDE) and the business’ earnings potential, giving you sense of how much it’s actually worth.

How do you choose an accountant when buying a business?

  • A good accountant should be a Certified Public Accountant (CPA) through the American Institute of Certified Public Accountants and be experienced in your industry.
  • They should be experienced with small business acquisition, including financial due diligence and business valuation. They should understand that there are several valuation rules of thumb, and not all types of businesses are valued using the same method.
  • Many accountants are also credentialed in business valuation and are certified as professional business appraisers.
  • Ask for a referral from someone you trust, such as your attorney or business broker. They may know of an accountant who is experienced with business acquisitions.

3. An experienced business broker. Here’s why you need one:

  • An experienced business broker is familiar with the local market, has established relationships with the business community and can help you search for a business for sale.
  • Most brokers usually specialize in certain industries. They can advise you on what to look for and what to ask the owner.
  • Oftentimes, they also do professional valuations and can tell you how much the business is worth.
  • They can also assist you in putting together an offer, guide you through negotiations and help you close the deal.

How do you choose the best business broker?

  • Search BizBuySell’s Broker Directory to find a broker in your local area. The broker’s profile should show the types of businesses they’ve sold and their areas of expertise.
  • Their profile will also indicate if they are a member of professional association, such as the International Business Brokers Association (IBBA) or a state association, such as the California Business Brokers Association (CABB).
  • In some states, such as California, business brokers are required to hold a real estate license, which is also important if a business includes real property or will be transferring a lease.

 

When it comes to buying a business, having an experienced team at your side can be extremely valuable. Their professional expertise and guidance is there to ensure you receive the most beneficial outcome. Plus, they bring a much-needed level of objectivity to a complex transaction.

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Commercial Services Business – Price Drop!

Our very profitable Commercial Services business listing (#3062) has a new lower price.  This Southwest Missouri business had $690K in Revenues and $252K in Discretionary Earnings in 2018.  See more information on this listing:

 

https://www.kingsleybrokers.com/listings/construction-and-remodeling-service-business/

or contact us at 417-889-9400 for more information on this service business.

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