Crosspoint Business Group - NJ Business Brokers

Questions for Business Owners:

Are you diversified?
A major problem with small companies is that their business is often focused on one or two major customers or clients, or their inventory comes from only one supplier.

A rule of thumb is that no more than 10 percent of one's business should be derived from one customer or client. Expanding to new markets, adding new products, or finding new customers without deviating too far from the business's core activities helps to build value.

Is there an area where you need to change course?
A big advantage of small business is its ability to quickly change direction, to rapidly react to changes in the economy or the marketplace, and to take advantage of new opportunities. Now may be a good time to evaluate any changes that need to be made.

How is your documentation?
Paperwork is not usually high up on the list of things to do for small business owners. Yet, the value of a business could depend on proper paperwork. Are contracts signed and available? Are the books and records up to date? Are all company agreements in writing?

Are your assets protected?
Many small business owners fail to trademark the name of a service, product or anything else specifically unique to their business. Proprietary written material should be copyrighted. If the name of the business is unique or important, it should be registered. Check Walt Disney or Kleenex - both have a small ® behind it showing that the name is registered. Secret recipes, brand names, etc. should be registered, copyrighted, trademarked, etc. - they are all part of building value.

Are you operating "lean and mean"?
Many larger companies outsource their logistical needs, their accounting, the sale of their products - even their manufacturing. Many smaller businesses outsource their accounting, their payroll, and their legal. Outsourcing can allow small businesses to focus on what they do best.

All of the above questions can help a business owner discover ways to increase the value of a business. Small business owners should keep in mind that creating value is critical to the long-term (and short-term) success of the business. And, sooner or later, most business owners decide to sell their business.

Seller Tip - know your bottom price and terms.

You should know what your lowest price is that you will accept for your business before you put it on the market. This is also true for the lowest down payment you would be willing to accept.

1. What all should be added back?

When normalizing a financial statement, it is easy to get carried away. After all, the more items that are added back, the more profitable the business appears. It is quite easy to add back the cost of a new roof for the factory or a new fancy neon sign on the basis that these are one-time expenses. However, an operating business always has some expenses like these each year and to add each and every one of them back as "one-time expenses" can be quite misleading.

2. What's the right multiple?

Likewise, the multiple can be very subjective. It is created by weighing and assigning a numeric value to such areas or factors as location, number of years in business, industry trends, sales trends, competition, or even such factors as the length of lease remaining, whether the owner will finance the sale and the reason for sale. In larger businesses, management stability, customer concentration, and geographic distribution are also considered.

A business intermediary can provide assistance in selecting which items to add back and what multiple to use in order to create a realistic listing price for your business.

This is the most often asked question by business owners when a business intermediary asks them if they are interested in selling their business. Often times, it is also a no-win question. If the suggested price is too high, the seller may be satisfied for the moment, but that satisfaction will end when the business fails to sell for the inflated price. On the other hand, if the suggested price is too low, the intermediary may be promptly escorted to the door.

So, how does the business intermediary come up with a price? The business intermediary will generally review the financials and add back certain items. This is often referred to as "normalizing" the financial statements. This is done by pulling out the proverbial non-cash deductions such as depreciation, interest, amortization and taxes (if shown on the statement) and either adding these amounts to profit or subtracting them from a loss.

The resulting figures are commonly referred to as Earnings before Interest and Taxes (EBIT) and Earnings before Interest, Taxes, Depreciation and Amortization (EBITDA).

For smaller businesses (for example, under $3 million in sales), the figure most often used to determine the sale price for a business is Seller's Discretionary Earnings (SDE). This is essentially EBITDA plus the seller/owner's benefits and salary/earnings.

Once the SDE, EBIT, or EBITDA figure has been established, it is usually multiplied by a multiplier. This multiplication then creates a suggested or recommended asking price.

The numeric values used as a multiple of SDE can range from 0 to 4 or even 5 in some cases. Typically, a small business will sell for between 1.8 and 2.5 times SDE although many businesses can fall under or over. Larger businesses can range from 3 to 8 times EBIT or EBITDA, but again can fall much lower or higher depending on the business.

While the process above creates a good starting point, it is important to remember that, ultimately, the price of a business is determined by what someone is willing to pay for it. In other words, price is determined by the marketplace.

Every seller should consider the answer to one question: "What would you pay for your business if you were going to buy it?"

If you are thinking about selling your business or have questions about the process, please give us a call. We would be glad to assist you.

Below you will find a number of areas for buyers to consider when looking at a business to purchase.

The role of the owner
One strength of many small businesses is the personality of the owner, which is closely connected to his or her relationships with customers and suppliers. An interested buyer should consider how the success of a business is related to the owner's personality and relationships and how well the relationships may transfer to a new owner. In a business where the owner's personality plays a pivotal role, it may be helpful for the owner to stay on for a period following the sale to help transfer some of his or her relationships to the new owner.

Loyal Employees
Happy and loyal employees create a strong business. A potential buyer will want to evaluate the satisfaction level of the employees, if possible. How well are the employees involved in the business? Is there transparency in business decision-making? Does the business provide good employee benefits?

Growth
Does the business demonstrate a history of growth? Has the owner developed new services, market share, and/or new markets?

Growth Potential
On the flip side, a potential buyer will also want to evaluate potential for growth that has been untapped by the current owner. Consider how you can improve marketing, customer service, scope of services, etc. It is not always wise to make such changes right after acquiring a business, but it is helpful to consider areas of potential growth.

A business intermediary can help business buyers consider other factors to consider in a business for sale.

Below you will find a number of suggestions to consider in order to build value in your business:

The role of the owner
One difficulty in selling many small businesses is the role of the owner. Too many times he or she is the "one man band." A new owner may have difficulty filling that role. While a business owner may not be considering selling, the time will come, sometimes unexpectedly. It pays for owners to work at making their businesses less dependent on them. One solution is to get one or more employees more actively involved in the role of the owner.

Important customers and suppliers
Too many "one-on-one" relationships with major customers and suppliers may also make a business harder to sell. An owner will want to work with more than one contact at important customers or suppliers so the personal relationships are not just one-on-one and more easily transferable to a new owner.

Loyal Employees
Happy and loyal employees create a strong business. Keeping employees involved in the business, creating transparency in business decision-making, and providing good employee benefits can go a long way in keeping employees happy and loyal, thus increasing the value of a business.

Growth
Small businesses tend to stay small because the owner wants to keep it that way for many reasons. The owner may want to maintain control, or maximize his or her own benefits. But, in order to build growth and subsequent value, the owner has to build new services, market share and/or new markets.

A business intermediary can help business owners consider other ways to increase the value of their business before the time comes to sell.