Business valuations are almost always difficult and often complex. A valuation is also frequently subject to the judgment of the person conducting it. In addition, the person conducting the valuation must assume that the information furnished to him or her is accurate.
Here are some issues that must be considered when arriving at a value for the business:
Product Diversity – Firms with just a single product or service are subject to a much greater risk than multiproduct firms.
Customer Concentration – Many small companies have just one or two major customers or clients; losing one would be a major issue.
Intangible Assets – Patents, trademarks and copyrights can be important assets, but are very difficult to value.
Critical Supply Sources – If a firm uses just a single supplier to obtain a low-cost competitive edge, that competitive edge is more subject to change; or if the supplier is in a foreign country, the supply is more at risk for delivery interruption.
ESOP Ownership – A company owned by employees, either completely or partially, requires a vote by the employees. This can restrict marketability and, therefore, the value.
Company/Industry Life Cycle – A retail/repair typewriter business is an obvious example, but many consumer product firms fall into this category.
Other issues that can impact the value of a company would include inventory that is dated or not saleable, reliance on short contracts, work-in-progress, and any third-party or franchise approvals necessary to sell the company.
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By Kim Eells, Vice President, The Brand Bank & Susan Kite, Vice President, Signature Bank of Georgia
1. When is a Business Valuation Required?
- If the purchase price of the business less the appraised value of real estate/equipment is over $250,000 or your deal is not an arms-length transaction or if the bank requires for comfort; cost is generally $2,500 – $3,000 and takes about 2 weeks.
2. What happens when the appraised value differs from Sales Price?
- An SBA loan cannot finance an amount higher than the business valuation plus appraised value of real estate/equipment. The Sales price could be negotiated and lowered. Or if Buyer wants to pay the higher amount, it is a lender call but any amount above the valuation must be justified by Buyer. It cannot be part of the loan or counted as buyer equity.
3. Will your Seller need to sign a Standby Agreement?
- There are varying degrees of standby: Full (no payments), Partial (interest allowed) and Springing (payments are allowed unless bank instructs Seller to cease taking them – usually when there is a default). The Seller note must be on Full Standby if it is being counted toward Buyer equity. In this case, the payments can usually begin after 2 years- unless the Full Standby is being counted as part of a 25% equity requirement when the value of goodwill and intangibles is over $500,000.
4. How are financing Partner Buy-outs different?
- These transactions are still considered a change of ownership, but are viewed as less risky than a full change of ownership. Professional Business Valuations are required, regardless of sale price or loan size.
CALL US IF YOU NEED A KNOWLEDGEABLE AND EXPERIENCED SBA LENDER THAT WILL WORK HARD TO GET YOUR DEAL CLOSED!
Susan Kite, Vice President, Signature Bank of Georgia, Business Acquisition Loan Specialist, , 770-595-9734
Kim Eells, Vice President, The Brand Bank , Business Acquisition Loan Specialist, 770-853-5625
By Susan Kite, Vice President, Signature Bank of Georgia, and
Kim Eells, Vice President, The Brand Bank
I. “This deal costs too much; I can’t get it financed.”
- SBA 7a Loans are guaranteed by the US Government, giving banks a higher comfort level to make a loan they may have denied as a conventional loan. SBA loan terms can be up to 25 years with no balloon. This means that your buyer only pays closing costs once.
II. “SBA Loans have too much paperwork.”
- All commercial loans require both business and personal financial information. SBA loans do have a few additional forms, but most of these just require a signature – and your lender may even help your buyer fill them out!
III. “I don’t have collateral to offer the bank.”
- SBA only requires that all available collateral be taken. Experienced business acquisition lenders understand that these loans have a high amount of goodwill. They look to the SBA guaranty to help offset that risk. There also may be other factors that help offset the risk such as your buyer’s experience, personal liquidity, and strong business cash flow.
IV. “SBA Loans take too long.”
- It may seem to take forever, but most SBA loans only take 6 to 8 weeks from term sheet acceptance to closing. An experienced lender will help you move things along.
V. “I tried to get an SBA loan, but the bank I went to said no.”
- While this could signal the end of your deal – all banks have a slightly different appetite for different types of loans. Suggest that your buyer not stop there. In fact, GABB’s Business Acquisition Lenders have a network of contacts. We can usually find someone interested in doing your deal!
Call us if you need a knowledgeable and experienced SBA lender who will work hard to get your deal closed.
By Susan Kite, Vice President, Signature Bank of Georgia, Business Acquisition Loan Specialist, 770-595-9734
Kim Eells, Vice President, The Brand Bank, Business Acquisition Loan Specialist, 770-853-5625Read More
Questions Business Owners Ask & Answers I Give Them
Veteran business broker Loren Marc Schmerler, a member of the board of the Georgia Association of Business Brokers and president of Bottom Line Management, Inc., offers his advice for answering common questions asked by business owners.
- How much is my business worth?
The correct answer is the price a Buyer offers you that you are willing to accept. It makes no difference whether you are making money or losing money. It makes no difference whether sales are increasing, declining, or flat. It makes no difference how much blood, sweat, and tears you have put into your business. It makes no difference how much money you have invested in the business. It makes no difference how much money you owe to the bank or to yourself. It makes no difference what a business valuation or appraisal says. It makes no difference what your hard assets are. It makes no difference what your customer list or client list contains. It makes no difference what your patents or service marks cost you. It makes no difference whether you are a Franchiser, Franchisee, Licensor, Licensee, Distributor, or Independent Contractor. The bottom line is that what you finally accept is what your business is worth.
- How long will it take to sell my business?
The correct answer is no one knows for sure. But I tell my clients that the average time is seven months from listing to closing. For companies that sell for $1 million or more, the average is nine to twelve months. But I also explain that the quickest I ever sold a business was one week, and the longest it ever took me to sell a business was six years. Additionally, I explain that price and terms sell a business. The lower the price, the more affordable the business will be. The lower the down payment, the more people will be able to consider it. The greater the amount of owner financing, the easier the business will be to sell.
- Is there anything I can do to make my business more desirable?
The answer is yes. The most important thing you can do is to put your ego aside and not make the business dependent upon you. Ideally, the goodwill of the business should be at the lowest level that interfaces with customers or clients. This means that you want to hire and keep employees who make your customers happy with high quality work and excellent customer service.
- Is there anything I should not due during the listing period?
The answer is that you should not slack off in any way. You need to stay focused and operate your business as if it will never sell. You need to work as hard or harder no matter how burned out you feel. Do not make any major changes during the listing period. Retain all good and excellent employees, and remove those that are not contributing as they should. Keep your inventory fresh, and eliminate any obsolete items. Keep your equipment and machinery well maintained and properly functioning.
- What is due diligence?
It is the process where the Buyer examines all your books and records, gets approved by the Landlord, gets approved (if applicable) by the Franchiser, Licenser, Distributor, bank, etc. Your books and records need to be current and “bullet proof.” Your tax returns for payroll taxes, sales tax, state income tax, federal income tax, county income tax, city income tax, and any other municipality taxes should be 100% current. Your various licenses need to be current, whether or not the buyer will have to apply for their own. You want to fully disclose everything and not leave any skeletons in the closet.
- What else do you suggest I do to impress a Buyer?
Have a job description for each employee. Put together a Policies and Procedures Manual. This will make the corporate buyer feel more comfortable about taking over the reins. Make sure all your employee reviews are current. The last thing a new owner wants to do is to sit down in a vacuum with an employee who is expecting a raise. Make sure you clean everything that is dirty. Make sure you fix anything that is broken. You do not want the Buyer to wonder what else might be a potential problem. Prepare a business plan and/or marketing plan to show the Buyer how he or she can grow the business. Put together a transition plan that shows the Buyer how you will assist them daily for a period of 28 days. The Buyer may not want you for the full transition period, but at least you are showing that you have thought it through and are willing to make yourself available.
- What happens if I agree to do some owner financing, and the Buyer misses a payment?
The way the closing attorney prepares the paperwork, if a Buyer misses a rent payment or a note payment, it is considered an event of default under the note. This will allow you to take back the business in a worst-case scenario or enter into serious discussions to protect your financial interests. While the best outcome is a Seller getting paid all their money and a Buyer being successful, you must plan for the worst and hope for the best. But I also tell my clients that they should never sell their business to a person they feel will not treat their employees, customers, clients or vendors properly. If you ever get a knot in your stomach during the negotiation, that is the time to throw in the towel and let me gently explain to the Buyer that you do not feel it is a good fit.
I hope this list of questions and answers has been helpful. I offer a free no obligation consultation at any time should you wish to discuss the sale of your business or the purchase of another business. Loren Marc Schmerler, CPC, APC, President, Bottom Line Management, Inc., 404-550-1417.
Some years ago, when Ted Kennedy was running for president of the United States, a commentator asked him why he wanted to be president. Senator Kennedy stumbled through his answer, almost ending his presidential run. Business owners, when asked questions by potential buyers, need to be prepared to provide forthright answers without stumbling.
Here are three questions that potential buyers will ask:
- Why do you want to sell the business?
- What should a new owner do to grow the business?
- What makes this company different from its competitors?
Then, there are two questions that sellers must ask themselves:
- What is your bottom-line price after taxes and closing costs?
- What are the best terms you are willing to offer and then accept?
You need to be able to answer the questions a prospective buyer will ask without any “puffing” or coming across as overly anxious. In answering the questions you must ask yourself, remember that complete honesty is the only policy.
The best way to prepare your business to sell, and to prepare yourself, is to talk to a professional intermediary.
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