Frequently Asked Questions
A qualified business broker will help you earn a fair price for your business while avoiding costly negotiating mistakes. A broker will be able to objectively evaluate your business to ensure you receive a market driven price while simultaneously helping you handle the negotiations.
Dealing with a professional business brokerage opens your business to many potential buyers. Just like most of us don’t want to limit the sale of our house or automobile to one buyer, you shouldn’t restrict your pool of buyers for your business either.
A broker will make sure that the minutiae associated with finding a buyer does not interrupt your attention from running your business, enabling you to focus on keeping the business as profitable as possible during this critical transition time.
Brokers know how to confidentially market your business to qualified buyers, possibly including some competitors, without exposing your intentions. We know how to maximize your exposure while minimizing the potential risk of having customers, employees, competitors and suppliers find out.
Selling a business requires a tremendous amount of time and knowledge. A broker can manage the whole process from the original listing through closing to make sure everything is done properly while you continue to concentrate on running your business.
Experience is critical. A successful broker will be licensed by the Real Estate Council of BC, and be focused strictly on selling businesses, not residential real estate.
A great way to validate a broker’s experience is by asking for referrals. A successful, experienced broker will have a number of referrals from satisfied clients who have sold their business.
With experience comes knowledge. An experienced broker will have the ability to structure a business transaction that is mutually beneficial to both parties.
Credibility is another important trait. If a broker guarantees that he can get the seller’s asking price or more, be wary. Since owners sometimes overvalue their business, sellers must be cautious if the broker says he can meet or exceed the asking price.
Make sure your broker understand the marketplace your business operates in.
A professional broker should have a proven method in place to closely manage the sale of your business. You need to understand how and when your broker will disclose this information with prospective buyers.
And finally, make sure your broker possesses the means to locate buyers both locally and nationally.
If your broker is unable to articulate to you what makes a successful business transaction, they’re not likely going to be able to explain it to a buyer.
Entire books have been written about business evaluation, and many variables are involved (many of them subjective), different “experts” looking at the same company could formulate different recommendations. The value ultimately will depend on both the buyer and the seller agreeing on a price. One of the most effective methods is the cash flow method. The cash flow method looks at your business’ true profitability. This means taking a look at your net profit plus factoring in any depreciation and interest expenses and all discretionary expenses you have as the owner of your business. Buyers are typically comfortable with this method because, although they are buying your business, what they are really buying is its cash flow. Once the cash flow is calculated, different multipliers can be applied to determine a fair market range of value. Multipliers vary depending upon the type of business. For example, a manufacturing facility likely would have a higher multiplier than a service business. Of course, many other factors can affect the multiplier. For example, new products in the pipeline, strong market share and a diversified customer base (i.e no one customer representing more than 10 percent of sales) can positively affect the multiplier. Conversely, outdated inventory, declining market share and the risk that key personnel would leave and disrupt the business could have a negative impact. You will notice that this method contains no mention of assets – furniture, fixtures, equipment and inventory. While these items contribute to establishing cash flow, by themselves, they have limited value. Assets are considered when a business is being sold under less than ideal conditions, such as when the business has no cash flow. In these cases, assets would be used to determine the value of the business.
To fully understand what your business may be worth, contact Welstand Group for an objective analysis of your business’ strengths, weaknesses and industry trends.
Firstly, many potential buyers don’t have the necessary capital or lender resources to pay cash for a business. Even if they do, they often want to leverage it into buying a larger business with greater cash flow. When a seller demands cash, buyers interpret this insistence as a lack of confidence in the business, the buyer’s chance to succeed, or both. This interpretation has some basis in fact. The primary reason that sellers shy away from offering terms is their fear that the buyer will be unsuccessful. If the buyer should cease making the payments, the seller would be forced to take back the business. The seller who operates under this fear should take a hard look at the positives associated with seller financing. Seller financing increases the chances that the business will sell. Making the terms attractive and attainable increases the pool of qualified buyers. A seller offering terms will command a much higher price. Buyers paying cash will demand a discount. With interest rates currently as low as they are, sellers can get a much higher rate from a buyer than they can get from any financial institution. And finally, the tax consequences of accepting terms can be advantageous. Instead of being taxed in the year that the sale occurs, in an installment contract, the seller’s capital gain is taxed over the life of the note.
By lending a helping hand to the buyer, you can help yourself as well.
Seller financing is an area where Welstand Group can be of assistance. We are able to recommend a number of payment plans that will make sense for you and the buyer.
There is no simple answer to this question. We’ve seen businesses sell in months and we’ve seen it take over one year. On average, it typically takes between nine to eighteen months to sell a business if it is appropriately priced.
If your business has positive cash flow and your representations are honest and accurate your business will sell.
Ask yourself if this is the right time to sell. If a business’ current financial picture doesn’t match the owner’s expectations, one or the other has to be adjusted.
As a seller, you must know your reason for selling. It is one of the first questions a buyer will ask, so you will need to be prepared to articulate your reason.
You will need to get your books in order. Prospective buyers will want to see at least three years of Tax Returns and Profit and Loss statements. As part of getting your books in order, you’ll need to understand your business’ true profitability or cash flow. Since most businesses claim a variety of non-operational expenses (i.e. personal auto lease, personal discretionary expenses, etc.), you must make sure that you have supporting documentation for these.
You must also make sure all of your legal commitments are in order. You need to review all of your permits, leases, client and vendor contracts, etc. and understand their impact on the business. For example, if your business’ location is key to its performance, a long term lease would be appealing to a buyer.
If you are absolutely vital to the business, efforts must be made to gradually delegate key responsibilities to various staff members, especially those related to customer relationships and revenue generation.
When a buyer is coming out to see your business for the first time, its important to make a good first impression. Buyers look for companies that show well because it can often be indicative of an orderly run business. The first impression can turn on off buyers and add subtract value from your business.
The common thread weaving through all of these steps is credibility. As a seller, if you want to keep buyers moving forward, you must show your respect by being open, honest and accurate about all things, both good and bad.
If you are interested in setting up a meeting to create an exit plan that will maximize your sale price, we are more than happy to setup a time that works for you.
This may be one of the most important concerns for a seller. For example, imagine the impact the news of a pending sale would have on your business when your competition, customers, employees and suppliers find out.
At Welstand Group, we go to great lengths to ensure that only motivated, qualified buyers find out that your business is for sale. Our procedures include, but are not limited to, interviewing all prospective buyers in person to understand their life experiences, business interests and capital they have to invest.
In all cases, before the name of your business is disclosed, all prospective buyers must sign a Non-Disclosure Agreement binding them to complete confidentiality.
1) A professional business broker can be helpful in many ways. Firstly, sellers who have listed their business with a broker are serious about selling. This eliminates wasted time dealing with owners who are not motivated to sell.
2) A professional broker will have many different types of businesses for sale, many of which you may not be aware of.
3) Brokers know the information you need to make an informed decision. Brokers maintain up-to-date information, signed and dated by the seller.
4) For many buyers, the process of purchasing a business is not a familiar process. A broker will be able to help guide you through all the steps and intricate procedures associated with buying a business. This will allow you to concentrate on getting ready to successfully operate your new business.
5) Professional business brokers will also have checkpoints along the way where you may bring in other advisors to help you analyze contracts and financial data. These experts in their field can significantly reduce the risk in your transaction.
6) A good broker will have many contact in the lending industry and be able to help you with financing and different types of deal structures, should they be needed.
There are many good reasons to buy an established business. By purchasing an existing business, the risks associated with starting a brand new business are dramatically minimized. Successful existing businesses have a proven track record of profits that generally continue long after a business has been sold. As the new owner, you can take the business to even higher profitability by incorporating new ideas, expertise and energy. A business with a well-known name, location, product mix, knowledgeable employees, etc. will enable you to focus on long range strategic planning rather than day-to-day minutiae. There will be no suffering through an extensive start-up period as you struggle to attract customers to your business. You can use the business’ established customer base for immediate cash flow and as your foundation for future business growth.
Another reason existing businesses can be very attractive is that typically you will be able to use the seller’s financing to leverage your buying power. This ensures that you get maximum impact for your investment dollar. As a new owner, you may be able to negotiate with the previous owner to ensure a smooth transition. Additionally, with seller financing, sellers will want to do everything they can to ensure your success.
Welstand Group is able to draft an Offer to Purchase that will cover all of the pertinent issues (i.e. non-compete agreements, trade name rights, leases, due diligence, etc.) plus any unique contingencies that are relevant to your purchase. Our expertise will allow you to concentrate on getting ready to successfully operate your new business.
Buyers need to take an honest inventory of their skills, knowledge and interests. Do you enjoy interacting with the public or are you more content behind a desk? Are you comfortable with managing people and making decisions? What technical skills or talents do you have that could be incorporated into a business? At this point, don’t be too concerned if you are unable to identify the type of business you are looking for. Normally, most successful buyers know what they’re not interested in, but don’t know exactly what would be attractive to them. A solid understanding of your financial situation is a key step involved in buying a business. You need to know how much money you are prepared to invest and how much money you would like to make.
The search now begins. Your broker seeks out businesses that match your profile. When you find one that is of interest, make an offer. This will show your seriousness. A well written Offer to Purchase and Sale will contain all the language necessary to successfully transfer a business while at the same time containing a number of contingencies that will give you important safeguards.
Once your Offer has been accepted, the next step is to begin your due diligence. There is no point in beginning this until you have reached an agreement with the seller on price, down payment and terms. This is the point where your attorney will approve the legal language in the Offer and your accountant will verify the financial statements supplied by the seller. The last step in the process is when your attorney will complete the necessary paperwork to ensure a smooth transaction. This includes lien searches, government filings, contacting governmental taxing agencies, promissory notes, bills of sale, etc. enabling the ownership of the business to change hands.
The broker will set up a meeting with the seller once you select a business in which you are interested. This will give you an opportunity to speak candidly with the seller and find answers to your questions.
If you are still interested in purchasing the business after a discussion with the owner, the broker will help you draft an Offer to Purchase and Sale based on the price and terms you feel are appropriate. View the chart above that highlights all the steps in the business sale process.
A business broker is a professional who assists in the buying and selling of businesses, helping to connect buyers and sellers while also acting as an intermediary throughout the process.
The Buyer acquires all or part of the company’s assets; while the Seller retains the ownership of the company entity (Shares).
CFO represents the cash generated from the operations of a company. Cash flow is also often used to identify the company’s earnings.
Not to be confused with revenue. Earnings are synonymous with the profit of the business.
= Earnings before Interest, Taxes, Depreciation, and Amortization. EBITDA is an indicator of a company’s financial performance. Could be normalized or not. When normalized it is net of any discretionary, non-recurring and non operational expenses or income. In essence, it is the Net profit of the business plus interest on long term debt plus taxes plus depreciation and amortization.
= Earnings before Interest and Taxes. It is the Net profit of the business plus interest on long term debt plus taxes.
The price at which the business and/or property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or to sell and both having reasonable knowledge of the relevant facts.
FCF represents the cash that a company is able to generate after meeting its reinvestment needs in the form of working capital and capital expenditures. Also called free cash flow to firm (FCFF), it is the cash available to be distributed to all capital providers of the company.
The collection of intangible assets represented in dollars by the difference between the total purchase price for the business and the net value of the tangible assets being purchased.
A company’s total sales revenue minus cost of goods sold, divided by the total sales revenue, expressed as a percentage. Gross margin is an important measure of a company’s profitability.
NBV is the value at which an asset is carried on a balance sheet. It is the historical cost of an asset minus accumulated depreciation.
Normalized financial statements are financial statements that have been adjusted to eliminate non-recurring and non-business related items.
A method of calculating financial results emphasizing projected figures.
SDE = Seller’s Discretionary Earnings. SDE is a commonly used valuation multiple for small businesses where the buyer would most likely be an individual or main street buyer, who would take on a hands-on approach to working in the business. It is typically EBITDA plus one owner’s salary adjusted to FMV.
The Buyer acquires all or part of the company’s stock/shares and the ownership of the company or specific shares/stocks is/are transferred to the Buyer. Since the assets of the business are owned by the company and the company is an independent entity and its ownership is represented by the shares/stock, purchasing the shares includes the assets and liabilities of the company unless otherwise specifically excluded.
Also called net working capital, though there are a number of methods for calculating this, it is traditionally calculated as total current assets minus total current liabilities, excluding interest-baring debt. Investment in Working Capital in the form of inventory and accounts receivable is necessary to maintain the company’s daily operations. Working Capital is a measure of both a company’s efficiency and its short-term financial health.