AA BUSINESS SALES
Buying or Selling a Business & Leasing
Frequently Asked Questions by Buyers:
Why should I buy a business rather than start one?
The failure rate in small business is enormous in the start-up phase and the
first three years. The existing business has demonstrated that there is a
need for that product or service in a particular location. Financial records
are available along with other information on the business. Most sellers will
stay and train a new owner and most will also supply financing. Finding
someone who will teach you the intricacies of running a business and who
is also willing to finance the sale can make all the difference.
Why should I go to a Business Broker?
Selecting the right, experienced broker for YOU is of utmost importance.
Your broker will carefully study your strengths and shortcomings,
experience, needs, likes and dislikes and will provide you with a selection
of different and, in many cases, unique businesses, including many that you
would not be able to find on your own, that better suit you.
Business brokers are also an excellent source of information about
businesses and the business buying process. They are familiar with the
market and can advise you about trends, pricing and what is happening
locally. Your business broker will handle all of the details of the business
sale and will do everything possible to guide you in the right direction.
How Are Businesses Valued?
There are literally dozens of formulas used for valuing businesses, but
there are three primary components for determining value: (1) Fair Market
Value of Assets (inventory,equipment,etc); (2) The ability of a business to
generate earnings (often times it is necessary to compare the true earning
power of a business by "adjusting" the income statement of the business
for discretionary expenses of the seller...we call this revised calculation the
"Adjusted Profit"); and (3) Demand (Certain types of businesses such as
manufacturing companies will usually command a higher purchase price
than retail firms with similar earnings).
Sale The sale of a business showing sales and profit is considered a
goodwill sale. The fixtures and equipment are included in the sale unless
otherwise specified. The sales and profit of the business must be proven to
a buyer by the review of the seller's books and records. This is the seller's
responsibility to provide the buyer with the documentation. In a goodwill
sale you will see many times that the profit is an adjusted amount. Many
business owners will charge personal use items against the financial
statement. These are items the seller deducts from the profits, but are not
used in the conduct of the business. These items are what is called 'add
backs'. They are added to the net profit to show an 'adjusted net profit'.
Most goodwill sales are priced at a multiple of the adjusted net. Multiples
will vary according to the quality and ongoing track record of the
Asset Sale F/F/E (Asset - Furniture, Fixtures, Equipment)
The sale of a business under the caption asset f/f/e is for a business that
the seller has put on the market whereas they cannot prove profits - or
there is no profit, or it is a break-even. Many of these offerings can be
excellent values for a buyer with the vision to change or turn a business
around. Many times the asset f/f/e price of the business is substantially less
than if you were to go and buy the fixtures & equipment, do the build out
and start from scratch. You will also enjoy some ongoing sales from the
previous owner. Be advised there is no book and record review. You are
buying the business as is
Books & Records Review
The most critical part of the sale of any business being sold as goodwill is
the books & records. The current business owner's responsibility is to
prove to a buyer the profit and adjusted profit of the business. This is
usually done after an agreed-upon price and terms have been completed
between buyer and seller. This is to be sure the buyer will qualify to buy
the business under terms and conditions suitable to the seller. Note: no
escrow is opened and no buyer's deposit is at risk until the books &
records contingency has been removed. The books and records can
consist of federal and state tax returns and state sales tax returns.
Prepared financial statements - check registers and bank statements
referring to the business. Again it is the seller's responsibility to provide the
documentation to prove sales and profits, and the buyer's responsibility to
perform due diligence to his/her satisfaction. The broker/agent will assist in
seeing that the proper documents are provided - but will not participate in
the due diligence.