Thinking about buying a business? More and more investors are considering the acquisition of an existing business as the best way to control their own destiny and accumulate wealth. It is estimated that over 80% of the millionaires in the United States own their own business.
Below are some questions that are frequently asked by entrepreneurs considering the acquisition of a business:
How Are Businesses Valued?
There is no simple method and there are numerous formulas for valuing a business. Our experience has shown that there are three key components that are used in computing valuation models:
Earning power is a function of annual earnings. For larger businesses, particularly those with audited financial statements, an EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) calculation is used. For smaller businesses, the calculation is adjusted to SDE (Seller Discretionary Earnings) by adding back the expenses attributable to private ownership and accounting for the salary of one owner.
Value of Assets
The appraised or fair market value of the assets being transferred, as well as other value drivers unique to the specific business, are also considered. These factors are overlaid on industry and transactional market data to come up with an appropriate capitalization rate, which is then applied to calculate a range of value for the business.
We are arguably in the best M&A Market in history and Colorado is generally recognized as being one of the best markets in the country.
Should It Be a Stock or Asset Sale?
Although each transaction must be reviewed on a case-by-case basis, most Purchasers acquire the assets of an existing company, rather than the stock of the corporation being sold. This is due to tax purposes and for the Purchaser to avoid assuming unknown liabilities of the selling corporation.
Should You Consult an Attorney and/or Accountant When Buying a Business?
Yes, buying a business can be very complex. We advise all Purchasers and Sellers to avail themselves of professional help when involved with the transfer of a business. Usually professional advisors do not get called in until the Purchaser selects a business and is reasonably certain that the Seller will sell on terms acceptable to the Purchaser. Attorneys are used to review contracts and prepare closing documents with appropriate protection for the parties involved. Accountants are consulted for tax advice and verification of existing financial data. In selecting an attorney and accountant, try to retain an advisor with prior experience in business transfers.
Is It Better to Buy an Existing Business or to Start a Business?
There are many advantages to investing in an existing business, but the reduced risk of failing is usually the most compelling. An existing business will have an established track record and customer base already in place. This existing customer base provides immediate cash flow and improves the probability of obtaining acquisition financing.
Why Should You Consult a Business Intermediary?
Unlike selling a house, when a Seller elects to sell a business, in order to maintain confidentiality, the Seller typically does not place a sign on the property or list the business in a multiple listing directory, unless appropriately “camouflaged”. Consequently, Purchasers may have difficulty locating businesses that are for sale.
At The FBB Group, we represent numerous businesses in a variety of different types and sizes. This selection, appropriate financial and operational data in our files, and our considerable experience in negotiating transactions can save Purchasers substantial time, effort, and expense in locating and acquiring a suitable business.
Additionally, as a result of the volume of transactions that we complete, we have lender contacts in place to provide the Purchaser with options for obtaining a competitive financing package.
The majority of our business is derived from referrals. Please consider referring our services if you encounter a situation involving the potential purchase or sale of a business.
Ronald V. Chernak
Inspiring business relationships since 1982!
(originally posted in the August 2018 newsletter)