Q: How do I know the value of my business or a business I want to buy?
A: Just ask! Don’t merely assume your business is worth a ton – or very little. And don’t buy a business without understanding its value and how that number was figured. A business for sale is worth only what a willing buyer will pay.
Q: What methods are used to value businesses?
A: Whether you’re a buyer or seller, know these about these methods.
Seller’s discretionary earnings multiple
A percentage of annual revenue
For most businesses, these two methods of valuing a business are most common. However, seller’s discretionary earnings (aka cash flow to owner) is more widely used because it actually reflects the performance of the business from an owner’s perspective. If sales don’t result in owner’s income, how can the buyer be confident of their ability to earn an income for themselves? Sometimes rules of thumb can be applied to resolve this dilemma. And, specific balance sheet items can impact value –furniture, fixtures, equipment, inventory, etc. Whatever method you use, be sure a professional has helped you determine whether this method is the best for the type of business.
Q: How do I maximize my business’s value before sale?
A: If you want to maximize your business value, start now.
Keep accurate records – financial, inventory, taxes, etc.
Report all income
Manage costs for high quality and low cost
Be well managed throughout
Always be working to define the next generation and take it there
A: Know yourself, your interests and capabilities to be an entrepreneur first, and succeed with this business, second.
Not everyone is cut out to run his or her own business. People who are successful employees may not succeed or be happy as a business owner. Plus, owners take on tremendous financial and legal liabilities that employees don’t have. And if you hate widgets you aren’t likely to enjoy owning a business that makes widgets.
Q: I’m thinking of buying a business. Where do I start?
A: Know what is critical to buying a business before you begin looking.
It is easy to be enchanted with a business for sale in New Mexico. Knowing your criteria for making a selection is critical. Ask yourself:
Will I enjoy and have the skills necessary to ensure the success of the business?
Is it a business I can be proud of and want to work at?
Is the business financially viable, now and looking forward?
Can I see the next generation of the business, knowing where I might take it?
Will the business support the work-life balance I want?
Q: How do I pay for a business?
A: Choose your options carefully.
It is very common for a number of financial sources to be put together to buy a business. For your own contribution, keep it reasonable. Leave yourself with a nest egg and a sum of money you might tap for the unforeseen. The current owner (the seller) could be a wise option for financing. Having their vested interest in the future performance of the company ensures they properly turn the business over to you and meet any commitments to help. They are often a less expensive financing means, too. Professional lenders such as banks and venture capitalists are additional sources for financing, with venture capitalists wanting more interest, faster return, and more input to the company operation. While venture capitalists may seem controlling, when wisely selected they can bring a big asset to achieving success.
Q: Should I buy a business from someone who is willing to sign a non-compete?
Without their non-compete, the selling business owner can totally eradicate your newly purchased livelihood by opening up shop next door. Have your legal advisor ensure a non-complete is a part of the agreements you sign. Length of non-compete, business scope, and geography are all critical components of non-competes.
Q: What is due diligence and when does it happen?
A: After you sign a buy-sell agreement.
Due diligence is the process of evaluating whether the business for sale is what it is presented as. Do the clients exist and how faithful are they? Is the net income (owner take) what is presented? Are the expenses claimed true and realistic and can you maintain them? What has the track record for performance been over a number of years, at least the most recent two years? Due diligence usually covers:
Quality of the output
Environmental challenge both internal and external
Forecasting performance based on what is found
Nature of contracts
Q: I have an attorney and/or CPA. Do I need a business intermediary?
A: Don’t do a deal without professionals around you.
Business intermediaries, attorneys, and financial advisors all have independent, critical roles in protecting you from a mistake. Expert valuation, legal documents, financial recommendations for the structure of the sale and general advice are all important to having a transaction that benefits you. To assume you know may cost you in a deal gone bad, limit your financial potential, or land you in court. Professionals protect your interest.
A: When you and the business are up. To maximize your profits, market when you are doing better than ever Selling begins well before you have to sell – by wisely reducing costs and increasing revenue. It’s always nice to go out on a high note.
Q: I’ve identified a buyer. Do I still need help during the sale process?
A: There are generally two ways to approach a transaction with a known buyer or known potential buyer. One is to work directly with the buyer, with support from professional. The other is to bring in an intermediary. This intermediary could be an experienced valuation professional or broker or another advisor who has valuation skills and transaction management experience. In either case, prepare just as you would when listing for sale: have your books in order; know the value of the business; have potential buyers sign non-disclosure agreements; and have professionals at your side to protect your interests.
Q: I have a buyer! Can I announce the sale now?
A: Until the deal is closed, the sale is not complete. Even after you have a buy-sell agreement, the business is not really sold. Anything can go wrong between the buy-sell agreement and the close of the sale. If you have elected for confidentiality, be very careful before you let the proverbial cat out of the bag. And keep running the business just as you would.
Q: What do I tell a buyer about my business? Does it matter if they are known to me or not in what I share?
A: Whether or not you know the buyer, and even if they are someone who has knowledge of the business, have talking points to share. Have a clear, honest explanation for why you are selling. Know what has transpired over the years and be able to go right to the source of information. Include the highs and the lows. And understand what the next generations of the company might look like when you leave.
Q: What financial information should I provide?
A: Have your books and systems in order. Inconsistent or messy records, or any unknowns can turn off a potential buyer. They’ll buy a different business that has a clear picture demonstrating history and performance, so keep tidy records. Knowing where you have been helps you have a successful business for sale in the future. Knowing where you stand today helps you know where you are going tomorrow.
Q: Do I need a business plan to show a buyer?
A: Having a business plan is vital. In today’s dynamic business environment, a two-year plan is probably all you can responsibly do. But whether you look out one year or fifty, having a business plan that accounts for potential obstacles and opportunities shows a buyer that the business is viable. A business plan should include these elements at a minimum:
Marketing–how you let your market know what you do and how you do it
Finances–where you are going to find and spend resources
Staff–those who are going to do your business, as employees or contractors
Services/products–what you are doing or selling
Service area–where you are going to conduct business (physical or virtual)
Q: Why is due diligence necessary for sellers?
A: As critical as it is for a buyer to do their homework, so should sellers. You may want to pre-qualify a buyer before you give them specific information about the company. And if you want confidentiality, the fewer people involved, the better. Due diligence ensures that buyers have the financial ability to purchase the business and, particularly if you are going to help finance the sale, that they have the expertise to successfully run the business.
Q: Should I have a buyer sign a confidentiality agreement? Why?
A: Sellers want anyone they work with to sign a confidentiality agreement. Even known buyers may not understand the need to keep confidential the details of the business, that the business may be sold, etc. Plus, as a seller, you have the obligation to keep confidential the fact that a buyer is talking with you – consider whether they have a job elsewhere and may lose it if their employer knew they were looking for a job. Confidentiality agreements routinely cover immediate family, lawyers and CPAs, too. These latter have a professional commitment to keep confidences. Need a confidentiality agreement – just ask!
Q: Can you help me find a qualified professional to list my business for sale?
A: Absolutely! Usually, such a relationship is with one individual who will represent your business internationally. We have collaborative relationships across the country and will help you find the best fit.
When you need to know what your business is worth, to a known buyer or open market sale, rely on our confidential valuation and consultation. Our buyer clients understand a business’ value. Our sellers position their company for the best sale possible. We focus on Central and Northern New Mexico, and work across the country. We partner with trusted brokers for listing and sale. Contact us today.