Is The Listing Price Crazy? How Business Buyers Can Make Sense of Add-Backs



 

Small businesses are complex little animals, and this is especially true when trying to determine whether or not a business is listed for a fair price. The pricing of businesses can be very confusing for buyers, especially those new to the small business world.

 

Taking a cursory glance at a tax return or a profit and loss statement can leave you scratching your head when comparing what you see with the listing price. How did the sellers get to that number?

 

The value of a business comes from cash flow, meaning an operating business has value for a buyer because it generates money. This money isn’t all just cash, however, as an owner benefits from their business in a number of ways. For instance, many small business owners pay for personal expenses as part of their business to minimize their tax liability.

 

These owner benefits that are funneled through a business can make determining the value to a buyer a bit complicated. To help with clearing up any confusion there is a metric used to determine the value of a small business called Seller’s Discretionary Earnings, or SDE.

 

SDE simply means that you take anything personal that an owner gets from their business or anything that was a one-time expense (something a buyer wouldn’t have to repeat or worry about) – and you add that amount back into what the business makes so you can determine what the cash flow actually is.

 

What kinds of expenses get added back?

 

Discretionary expenses, like paying for a car or cell phone through the business. Think of these like perks that a buyer might not necessarily take, so that expense is added back in to show a buyer what the numbers look like without the added perks taken out.

 

Extraordinary expenses, like a very high salary paid to a family member who works in the business – a family member who would probably not be staying on once the business is sold. The amount of this salary that is above the industry norm would be added back into the business to normalize the payroll numbers. This way a new owner can see what the cash flow looks like with staff who only take a standard salary.  

 

Non-Recurring expenses, like the cost of repairing water damage from a broken pipe. The new owner wouldn’t need to pay for something like this continually, so the one-time expense is added back in.

 

Non-Cash expenses, like depreciation. The tangible assets a business has, like the equipment or vehicles, will lose value over time. Although not the only factor in depreciation, you can think of this add-back as something related to what the business writes off for tax purposes.

 

Once all of these add-backs have been “added back”, you will be able to see the cash flow a business generates. This clearer picture will allow a prospective buyer to decide if a listing price is fair or not.

 

Still confused? Your business broker is there to help you untangle the parts of the small business world that are inherently complicated – like add-backs and listing prices. Talk to your broker if you think a listing price seems crazy or if you don’t agree with what was added back. They can make sense of the numbers – so you can make an informed choice about how much you would be willing to pay for a particular business.

 

Do you have more questions about add-backs? Would you like to know how sellers typically come up with listing prices? Ask us! Leave any questions or comments here and we would be happy to help.  

 

 

Michael Monnot

941.518.7138
Mike@infinitybusinessbrokers.com
12995 South Cleveland Avenue, Suite 249
Fort Myers, FL 33907

http://www.infinitybusinessbrokers.com


Worried About The Market? Deciding The Best Time To Sell Your Business



The last year has been interesting – and with the economy, markets and housing prices growing at a great clip it can be a bit reminiscent of the pre-2008 bubble. If you are a business owner who is considering selling now or in the near future, this possible pre-bubble climate could make you nervous. You never know when the next 2008 might hit, and for those entrepreneurs who weathered the 2008 storm a very big question might be: How do I decide the best time to sell, especially if the market might take another tumble?

 

 

 

First and foremost, if you are making the moves necessary to get your business on the market but it isn’t quite there yet – don’t panic. If you’re not planning on selling today but would like to in the next 5 years – don’t panic. See a trend? The market is going to do what the market is going to do. Rather than worrying about something you can’t control – focus on the things you can.

 

Be flexible.

You might have plans for when you’d like to sell your business, but the small business market rises and falls on it’s own – and it doesn’t care what those plans are. Flexible business sellers watch the trends and adjust accordingly. Are businesses in your industry a hard sell right now? Maybe waiting out the market for a bit longer is the smart move. Is your industry currently a hot sell? Maybe you need to get your business listed now while the market is in your favor. You need to be willing to go with the flow if you are going to have the most successful sale you can.

 

Don’t spend all of your cash.

You don’t need a major remodel in order to sell your business. The new owners are going to change what is important to them, and your remodeling choices will more than likely not be the same as what they choose – so don’t waste the money. The average listing is 9-12 months, so you need to keep that cash on hand – just in case the market starts to fall and your business needs that money to stay afloat.

 

Marketing, marketing, marketing.

No matter what the economy looks like, businesses that stop marketing are businesses that will end up dead. No one wants to buy a business that isn’t trying to grow and gain new customers. You should always keep retooling and tweaking your marketing strategy until the day you hand the new owner the keys. Another reason you should always have an eye on growth? If the market sours and you need to keep your business a while longer in order to maximize the amount you are able to get in a sale – you haven’t taken your foot off the gas and hurt the business you now need to create income.  

 

The message here is no matter what the market does (or doesn’t do), remain optimistic about your business and it’s future. Keep marketing and growing, save your cash and be realistic and flexible with your decisions about when to sell.

 

Are you considering selling and want to know what the market currently looks like for a business in your industry? Would you like advice about when the best time to sell might be? Please leave any questions or comments here and we would be happy to help.

 

 

Michael Monnot

941.518.7138
Mike@infinitybusinessbrokers.com
12995 South Cleveland Avenue, Suite 249
Fort Myers, FL 33907

http://www.infinitybusinessbrokers.com


Picking A Broker? Why Referrals Are A Big Deal



If you are looking at businesses to buy or are thinking about selling the business you own, you should really, really care about referrals.

 

 

 

Buying and selling businesses can be a tough and messy thing to do, so there are professionals out there called business brokers who help buyers and sellers reach a closing table.

 

Like any industry, there are business brokers who are fantastic and there are business brokers who are terrible at their job. How can you as a buyer or seller figure out if the broker you are considering working with is great or awful? Ask them a simple question.

 

How much of your business comes from referrals?

 

Referrals happen when previous clients or industry professionals like accountants, real estate agents or attorneys find out that someone is looking to buy or sell a business. They refer that person to a business broker they have previously worked with or know on a professional basis.

 

No one is going to give someone the name of a business broker they hate, so if you are working with a broker who gets the bulk of their business from referrals – it can tell you as a potential client a great deal about how this person conducts themselves in a business transaction.

 

We, for instance, get a great deal of our business through the referral process. Like 60-70%. Does this mean that we’ve made every client absolutely happy? Nope. But it does mean that we work very hard to get our clients to their goal. We do more than is expected and our past clients see that – especially when the other broker in the transaction does little to nothing to help the deal along. The difference between what we do and what the other broker in a typical transaction doesn’t do is the reason people send their friends our way.

 

The same goes for the professionals we work with throughout the transaction process, like attorneys and accountants. They’ve typically worked with other brokers who make big mistakes and expect everyone else to do the work for them – and after working with us they send any potential business our way instead.  

 

If you want the best help on your journey to buy or sell a business, your best bet is to ask any broker about their referral rate. The good ones will be happy to tell you that they get a good chunk of their business from happy past clients and business associates.

 

Would you like to know more about what business brokers can do to help buyers and sellers in a business transaction? Do you have questions about our referral rate? Ask us! Feel free to leave any questions or comments here.

 

 

Michael Monnot

941.518.7138
Mike@infinitybusinessbrokers.com
12995 South Cleveland Avenue, Suite 249
Fort Myers, FL 33907

http://www.infinitybusinessbrokers.com


New Year, New Adventure – Why The Key To Happiness In 2017 Is Business Ownership



 

 

We all do it. We come up with fabulous and complicated New Year’s resolutions and then fail miserably within the first three weeks of the new year. We all want to be thinner, in better shape, more organized.

 

If you consider them as a whole, what are all of our collective New Year’s resolutions really about? They’re about happiness. If you are thinner, then perhaps you’ll be happier. If you’re in better shape or if you’re more organized, then perhaps you’ll be happier.

 

The reason these resolutions fail is they only scratch the surface of the underlying goal you are trying to achieve. Losing 20 pounds might initially make you happy, but you still have to get up and go to the job you hate every day.

 

Happiness is less about superficial changes and is more about living with a sense of purpose. It comes when you feel fulfilled in your daily life.  How do you reach fulfillment?

 

Take control of your career and follow your passion by becoming your own boss.

 

It may seem like a daunting proposition to become your own boss, but taking the entrepreneurial plunge doesn’t mean you have to come up with a genius idea and build a business from the ground up. You can enter the world of small business ownership by simply buying a business that already exists.

 

The benefits of taking this route to business ownership are easy to see. Buying an existing business means you don’t have to contend with coming up with a concept, finding and then equipping a location, finding and training a new staff, establishing a customer base, obtaining initial licenses and permits – the list goes on and on. All of this “start-up” work has already been done, and you even have the previous owner to train you when you take over so you aren’t walking in cold.

 

If you are thinking that buying a business might be a great part of your 2017 plans, you probably have some questions:

 

How much money does it take to buy a business?

The answer is, it depends. Sure, there are multi-million dollar businesses on the market – but there are also many smaller businesses that would require a much smaller initial investment. Many business sellers also offer the option of seller financing, so you may be able to get a business that would suit your goals without having to pay all cash.

 

What kinds of businesses would be right for me?

Remember that the point of business ownership is to have control over your own destiny and to feel fulfilled in your daily life. You shouldn’t buy a business where you aren’t going to be happy – without drive and passion you will most likely run the business into the ground. You also shouldn’t buy a business you know nothing about. Giving yourself the massive hurdle of trying to learn a whole new industry on top of learning how to run your new business just means you are setting yourself up for failure.

 

Think about what your goals for business ownership are. Do you want a more flexible schedule? Do you have a particular passion that you want to turn into a career? Are you looking to make a long term commitment to a business or are you looking to grow and then sell your new business for a profit? These types of questions will help you decide what types of businesses would be right for you.

 

What’s the next step?

Contact a business broker. They can help you figure out what businesses would be right for you based on your goals for business ownership and the capital you have available.

 

Get yourself on the path to business ownership and happiness in 2017!

 

Do you have more questions about the process to buy a business? Would you like to know what businesses are currently available? Ask us! Please feel free to leave any questions or comments here and we would be happy to help.

 

 

Michael Monnot

941.518.7138
Mike@infinitybusinessbrokers.com
12995 South Cleveland Avenue, Suite 249
Fort Myers, FL 33907

http://www.infinitybusinessbrokers.com



Michael Monnot

941.518.7138
Mike@InfinityBusinessBrokers.com

12995 South Cleveland Avenue, Suite 249
Fort Myers, FL 33907

Michael Monnot

941.518.7138
Mike@InfinityBusinessBrokers.com

12995 South Cleveland Avenue, Suite 249
Fort Myers, FL 33907




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