Monday, May 21, 2012

Steps to Buying A Business - Part Two

How to Identify a Business to Buy

Once you've decided that you're committed to buy a business, and decided on the type of business that you're both passionate about and can be profitable, you have to decide how to identify the business.  Fortunately, you can use multiple avenues, you're not straddled with one source.  The main sources of identifying businesses are brokers, intermediaries, buyers' agents, and 'FSBOs'

Traditional Business Brokers

Traditional business brokers typically have an inventory of small, main-street type businesses for sale that they represent.  These are typically businesses that have less than $500,000 in revenues, and are priced at $200,000 or less.  Commonly these brokers are franchises, such as Sunbelt Business Brokers and others.  They typically have offerings in small non-franchise restaurants, small retail shops, etc.  

This type of broker represents the seller, and the seller will pay a commission to the broker upon the sale of the business.  Typical commissions are 10% of the actual selling price, and the seller doesn't pay anything up-front, very similar to a real estate broker.  The average broker has 10 - 15 active businesses for sale (or 'listings') active at any time, with the understanding that only 2 or 3 will sell in any given year.  

Some business brokers are very good, but in many cases the brokers are under-experienced and rely on multiple listings to generate income.  For this reason, it's imperative that you get referrals before using a traditional business broker.  In this model, the seller pays all sales commissions.

Intermediaries

Another class of business broker is the intermediary.  These are usually credentialed professionals identified as CBI or CBBI.  Although they still represent the seller and not you as the buyer, their goal is to facilitate the transaction and help both parties to obtain a successful transaction.  

The intermediary typically represents only a few businesses at a time, and typically expects a 2 -3 year sales cycles.  These also represent sellers with revenues up to $10,000,000 with sales prices of $1,000,000 to $5,000,000.  In this model, the seller pays all sales commissions.

There are fewer intermediaries than business brokers, and most are independent and not franchised.  The best source of finding these type of brokers are CPAs, lawyers, and bankers.


Buyer's Agents

 Another choice is the Buyer's Agent.  The main difference here is that the agent is representing you, not the seller.  The agent will actively seek out opportunities that are right for you, even if they're not actually for sale.  They will typically charge you an up-front fee of anywhere between $2,000 and $10,0000 for the initial search, and some percentage of the purchase price at closing.  These types of agents are many times able to find the "hidden" businesses for sale, that may be much more appealing than the businesses that are publicly for sale.

Business FSBOs

A final class of businesses for sale are FSBOs, or "For Sale By Owner."  These are typically found in the classified ads of newspapers (the few that are left), trade magazines, and websites such as bizbuysell.com.  The upside to these listings are that there are no commissions paid by either the buy or sell side.  The downside is that there is typically no packaging, and the process is ad-hoc at best.

Keep in mind, all businesses are for sale at the right price, even if they're not listed - some of the best businesses aren't listed for sale.  And, if you're already a business owner looking to expand you business by buying a similar business, the cheapest way may be to simply recruit their best employees!  Of course, they may try to do the same to you.

In my next post, I'll discuss the initial steps after identifying a business to buy.

For more information, feel free to contact us!

B. Dane Byers, CPA, ABV, CFF
Bassett & Byers, P.A.
Partner
3701 Lake Boone Trail, Ste 201
Raleigh, NC 27607
dbyers@bassettcpas.com
(919) 303-1049



Steps to Buying a Business - Part One

So, you've decided to buy a business!


There is nothing more exciting, financially rewarding, and scary than being an entrepreneur with your own business.  This series of posts will help you understand the process of identifying the right business for you, how to investigate and negotiate, and how to finance your acquisition.

The first step is to decide whether you want to start a business from scratch, buy an existing business, or buy a franchise.  Starting a business from scratch may appear to cost less in up-front money, however it generally takes longer to get to profitability, so while buying a business may cost more up-front, you'll generally get to profitability faster.

Next is to decide what type of business to buy.  There are two criteria to keep in mind;  What are you passionate about, and what makes a profit.  There are several types of businesses that only satisfy one of those criteria.  The "right" business is the one that you are both passionate about, and can turn a profit.

The basic steps in the process, once you've decided to buy a business, are deciding how to identify the business to buy, the preliminary due diligence, making a non-binding offer, performing advanced due diligence, negotiating the final price and terms, closing the transaction, and finally transitioning into ownership.

We'll explore these topics more in depth in the next posts.



B. Dane Byers, CPA, ABV, CFF
Bassett & Byers, P.A.
Partner
3701 Lake Boone Trail, Ste 201
Raleigh, NC 27607
dbyers@bassettcpas.com
(919) 303-1049




How to Value Your Business - Part Five

Let's now look at the most difficult, but the most economically-relevant way to value your business.  This is the discounted earnings approach.  The methods used in this approach include the discounted cash flow method, the single-period earnings capitalization method, and many others.

This approach and its underlying methods are based on the principle of economic substitution.  That's really just a short way to say that given a certain potential output and price, would you rather bet on option x or option y, given the risk of NOT achieving the expected result.

There are three variables to consider in any bet.  First, what is the amount I have to pay.  Second, what is the amount of the potential payoff.  Third, how risky is the bet (or what is the chance that I pay the price but don't get the amount of the payoff).

All three of these elements are interrelated.  The lower the risk, the closer the purchase price and the payout price are.  The more risk there is, the less the price is compared to the potential payout.  Furthermore, if you know any two of the three variables, you can (with simple algebra) derive the third variable.

Let's put this concept in investment terms.  US T-Bills are near zero-risk.  That's why the interest rate (risk rate) is near zero.  So, since you're almost guaranteed a 1% return with no risk of losing money, you're willing to pay more than, lets say, putting money into the latest sexy IPO like Facebook (FB).  If however you want to put money into FB, you want the chance to earn 20% on your investment, so the relative price has to be lower than a US T-Bill.  The downside is the risk that FB will not give you a 20% return.  The value you assign to this bet, then, has to equalize the risk between an almost guaranteed 1% return and a less-likely potential 20% return.  Under the concept of economic substitution, the correct price is where the amount you're willing to pay for a risky 20% payoff is the same as the price you'd pay for a more-guaranteed 1% return.

Under this method, we derive two values and solve for the third variable.  In this case, we have the risk variable (interest rate) and expected return.  We then solve for the third variable, the purchase price.

Although this method is the most difficult to understand, it's the most economically-defensible and is somewhat more formula-based than others.  There is much more to this method than can be explained here.  However, we invite you to contact us to better understand how to apply this method to valuing your business.  Please feel free to contact us to help you value your business.

B. Dane Byers, CPA, ABV, CFF
Bassett & Byers, P.A.
Partner
3701 Lake Boone Trail, Ste 201
Raleigh, NC 27607
(919) 303-1049
dbyers@bassettcpas.com








How To Value Your Business - Part Four

Let's look at the asset approach next.  Like the market approach, there are several specific models (methods) that are in this general category.  All of the methods restate assets to their fair market value (not book value, but what they could actually be sold for on the open market), and restate liabilities to their fair market value.  The latter may seem more obvious than it actually is.  For example, your business may have a loan with a below-market interest rate - this means the liability is actually lower, on a fair market value, than on your books.

After restating, you simply subtract the liabilities from the assets, and the difference is the net worth of your company.

The difficult part is in determining the fair market value of intangible assets.  These assets can include (but are not limited to) goodwill, established brand names, marketing, in-place trained workforce, policies and procedures, licensing rights, patents and copyrights, and many others.  These assets are not normally recorded on your accounting books, and there are numerous ways to identify and value these types of assets.  This is why this method is so difficult to apply.

Additionally, these assets and liabilities have to be valued as a group of assets and liabilities, as if they were sold as a single package and not as separate and distinct assets and liabilities.  This makes it even more difficult to assess the value of the company under this approach.

This approach and its underlying methods are most frequently employed in a valuation of a company in bankruptcy, and is not frequently used in the valuation of an ongoing operating company.

To learn more about this approach to valuation and to help value your company, please contact me.

B. Dane Byers, CPA, ABV, CFF
Bassett & Byers, P.A.
Partner
3701 Lake Boone Trail, Ste 201
Raleigh, NC 27607
(919) 303-1049
dbyers@bassettcpas.com

Thursday, April 22, 2010

How To Value Your Business - Part Three

Now that we've talked about the "type" of value (Fair Market Value vs. Strategic Value) and introduced the three methods of valuing your business, let's look a little more at each method. In practice, we look at the cash flow method first, then the comparable-sales method, then last at the asset method - although frequently we only look at the first two methods and discard the asset method.

However, let's look at the comparable-sales method first - that's the easiest to understand and apply.

In the "Comparable Sales Method" (let's call it the Market Method), we look at what companies comparable to yours have sold for. We look at the sales price of the company as a function of revenues, EBITDA, or some other measure. Most commonly, it is a measure of revenue or sales. For example, we observe that most CPA accounting firms sell for 1.2 times revenues. Or, that most restaurants sell for 0.5 times revenues. We have large databases of sales data that we can correlate prices vs. specific elements.

This is also where you hear about "rules of thumb" - for example, "auto repair shops sell for 2 times revenue plus inventory" - etc.

The downside to the market method is that each company is unique, and a general rule of thumb may not apply to your business. At best, this method is used as a sanity check against other methods - the rule of thumb should be in a reasonable range of the value obtained from the other two methods of valuation. However, a rule of thumb should never be used as a primary determinant of value.  It's sort of like a home remedy - it may help in some cases, but you don't want to bet your life on it!

To learn more about valuing your business and how to apply the market method, please feel free to contact me.

B. Dane Byers, CPA, ABV, CFF
Partner
Bassett  & Byers, P.A.
3701 Lake Boone Trail Ste 201
Raleigh, NC 27607
(919) 303-1049
dbyers@bassettcpas.com

How to Value Your Business - Part Two

Ok, so we've talked a bit about "fair market value" versus "strategic value", and you understand that "strategic value (what it's worth to you)" is usually higher than "fair market value (what it's worth to Mr. Smith)".

The investment world is driven by "Fair Market Value" - let's call this FMV to make it easier from here on. And, let's call Strategic Value "SV", although I'd prefer "SRV" as I'm a Stevie Ray Vaughan fan but we can go with SV.

There are three (3) basic valuation models. Not two, and not four - there are only three.

First is the cash flow model - either historical cash flows or anticipated future cash flows are used to determine a value of the business. There is a lot more to this model that we'll discover in future posts, but for now just understand that a company is worth what it's cash flows are.

Second, we can look to what other similar companies have sold for. This is like the appraisal you get on your personal residence - we look at sales of businesses similar to yours. Again, there are a lot of caveats here.

Third, we can look at what the assets of the company are worth, including intangible assets such as brand recognition, goodwill, etc. This is the easiest of the methods to understand, but one of the hardest methods to apply. More on that later....

If you're ready to value your business, please feel free to contact me, I'll be glad to explain the process to you and help you value your business.

B. Dane Byers, CPA, ABV, CFF
Bassett & Byers, P.A.
Partner
3701 Lake Boone Trail, Ste 201
Raleigh, NC 27607
(919) 303-1049
dbyers@bassettcpas.com

Tuesday, April 20, 2010

How to Value Your Business - Part One

THIS IS PART ONE OF A SERIES OF POSTS ON HOW TO VALUE YOUR BUSINESS

Your business is probably the largest asset you own (next to your house, which has probably gone down in value the last few years), and it's almost like your only child. You've nurtured it for years or decades, and when it's time to separate, you want it to be well-taken care of. Or, maybe you don't - you just want the most amount of money you can get for it (your business that is, not your child....) - neither viewpoint is wrong; on the contrary, it's something you've created, and you have the absolute right to determine how you want to divest it and spend your retirement.

The first step in understanding the value of your business is understanding the definition of the word "Value." Now, I'm not talking about the Clinton-esque stylings of asking for the definition of the word "is", but I recognize that there are differing definitions of value....For example, how many times in the last few months have you heard a neighbor say they want to sell their house, but they can't get what it's worth right now....That's actually a very good object lesson on the difference between Fair Market Value and Stragetic Value. "Fair Market Value" is what the property is worth to the average, uninterested buyer - but Strategic Value is what it's worth to YOU. Strategic value is always higher than Fair Market value.

The first step in selling or buying a business is to understand the definition of "value" and how that affects your purchase / sale decision. To get a better understanding of the definitions of "value" and how it affects your decision, feel free to contact me.

B. Dane Byers, CPA, ABV, CFF
Bassett & Byers, P.A.
Partner
3701 Lake Boone Trail, Ste 201
Raleigh, NC 27607
(919) 303-1049
dbyers@bassettcpas.com