Metrics Of Health – Why Buyers Should Consider More Than Price



If you are a prospective entrepreneur looking to buy your own business, you may have already noticed the unique nature of business listing prices – they seem to be all over the place.

 

How do you as a buyer interpret the listing price of a business as it relates to its fiscal health?

 

Listing prices are typically based on the cash flow the business generates, but there are other aspects that will speak to the overall health of a business which buyers should pay attention to. Here’s a few to consider:

 

 

Consistent Numbers

If a business has very consistent numbers, it might mean less risk for a buyer. Remember that the value of a business to you is the earnings it will have in the future. Consistency year over year is what you are looking for. Many businesses will have seasonal fluctuations that have everything to do with the local economy and seasonal shifts and nothing to do with the health of the business. If you are seeing large annual fluctuations, ask your business broker if those fluctuations are merely seasonal or something more problematic.

 

Operating Profits

In order for you to pay yourself and pay back any debt you incurred with the purchase of the business the business will need to be generating operating profits. A business with numbers that consistently show operating profits will be a better bet than a business that is only breaking even. A caveat here – a business that isn’t doing so well but has easily remedied issues (like staffing changes, adding a marketing plan where none exists, etc.) might be a good deal if you can get it for a great price. 

 

Diverse Customer Base

In a business that has a diverse customer base the loss of a single customer will not be as catastrophic as it would be for a business with only a small handful of clients. Look for both a large number of clients and clients across a diverse spectrum. 

 

Reputation and Brand

A business with a great reputation or a very well established brand will have a more loyal clientele, meaning less work for you as the new owner. Instead of having to spend your time rebuilding a poor reputation you will be able to focus your marketing time on acquiring new customers.

 

Good Managers

If a business is well managed by the staff without the owner having to be present 100% of the time – and if those managers/staff are willing to stay on if the business changes hands, it can be a good sign for a potential buyer. It will mean less disruption when the business changes hands and less of a learning curve for you as a new owner because there will be staff present to help with many aspects of day-to-day operations.

 

If you need help determining if the listing price of a business really reflects reality, talk to your business broker. They know the current market, what recent comparable businesses have actually sold for and what aspects of a business can bring the most to a new owner.

 

Are you a future business buyer who has questions about the value of businesses you have seen for sale? Have you come across businesses that seem over or under priced? Leave us a comment or question and we will be happy to assist you with your business search.

 

 

 

Michael Monnot

941.518.7138
Mike@InfinityBusinessBrokers.com
5111 Ocean Boulevard, Suite E
Siesta Key, FL 34242

www.InfinityBusinessBrokers.com

 


Advice About Your Business Deal – The Good, The Bad And The Unhelpful



In the business transaction world, it happens all the time. A deal between a buyer and seller seems to be headed to a happy closing table and then suddenly the deal is dead. What happened to kill the deal? More often than not, someone got some bad advice.

 

 

What kind of advice is bad advice?

 

When you are trying to buy or trying to sell a business, advice from anyone who has little to no experience with the process of buying and selling businesses is probably not going to be very productive. Here are a few examples:

 

A listing agreement (which gets your business listed on the market) includes protections for both the seller of the business and the business broker who makes the transaction happen. These agreements are fairly standard, and if you as a seller refuse to sign one, you are going to have a hard time trying to find a decent business broker to help you with your sale. These agreements are a legal document, so some sellers give the agreement to their lawyer (who has no business transaction experience) to look over before they sign it.

 

Another standard document (geared toward buyers) is the non-disclosure agreement (NDA). NDAs exist to protect the business itself during the transaction process as buyers are privy to the for-sale status of a business, confidential financial documentation and potentially proprietary information. The NDA is something you are going to have to sign if you want access to information about businesses on the market, and you’re going to have to sign one for each business you inquire about. Like the listing agreement, the NDA is fairly standard across the industry and is a legal document that some buyers will hand off to their lawyer before they sign it.

 

There is something essential about lawyers to point out here. Your attorney’s job is to make sure you are legally covered and completely free of any risk. As a business owner (or future business owner) you should already know that any business deal is going to come with a bit of risk – it’s the nature of the beast. So how do you reconcile the opinion of someone you have hired to protect you from any and all risk with a business transaction that may carry some risk on your part? The short answer is you don’t. If you give your attorney who helped you with your divorce or the one who helped you sue a contractor for negligence a business listing agreement, a NDA or for that matter any agreement you may become a party to during a business sale, they will likely tell you not to sign it, or only to sign it if they are allowed to make a lot of changes (which is likely out of the question).

 

What should you do then? Hire a business transaction attorney instead. A business-specific attorney will be able to advise you during your business sale because they have done it before and know what they are doing. They are already familiar with typical agreements, they know the ins and outs of the process, and will be a far better legal guide.

 

Another example of advice that can be counter-productive is advice from the CPA who usually does your taxes. Unless they have been a part of business transactions in the past, they are going to be a problem for the same reason that your regular attorney is – it is their job to cover you and you alone. The issue that arises with a CPA who is unfamiliar with business transactions is they may not understand the way businesses are evaluated and how they are priced. With many types of businesses, the value comes from more than just what shows up as black and white on a profit and loss statement. When you ask your regular CPA to take a look at the business you may end up with inaccurate advice. Instead, hire an accountant familiar with business transactions because their advice will be far more valuable.

 

What about advice from your friend’s brother-in-law who used to be a commercial real estate agent, from your neighbor who owned and sold a business 25 years ago, or from your good friend who’s a dentist? Listen to all of the advice you get, but remember to filter what you hear because professionals who do business transaction work for a living are probably best qualified to answer your questions. If unsolicited advice leaves you second guessing your choices in the transaction, by all means talk to your business broker, transaction attorney, and transaction CPA before you decide to back out of a deal. You don’t want to miss a great opportunity because you got terrible advice!

 

Have you been in a deal that fell apart because of bad advice? Share your experience here! Do you have more questions about the roles of business brokers, transaction attorneys or transaction CPAs? Please feel free to leave us any questions or comments – we would be happy to help.

 

 

 

Michael Monnot

941.518.7138
Mike@InfinityBusinessBrokers.com
5111 Ocean Boulevard, Suite E
Siesta Key, FL 34242

www.InfinityBusinessBrokers.com

 

 

 



Michael Monnot

941.518.7138
Mike@InfinityBusinessBrokers.com

5111-E Ocean Blvd
Siesta Key, FL 34242

Michael Monnot

941.518.7138
Mike@InfinityBusinessBrokers.com

5111-E Ocean Blvd
Siesta Key, FL 34242




Search



Recent Posts

Categories

Archives

Tags