Archive for January, 2010

Figuring Out What Your Business is Worth

Wednesday, January 13th, 2010

Use several different methods to set a price that maximizes the value in your business.

Before you can put your business on the market, you need to figure out how much it’s worth. Price your business too high and you’ll scare off potential buyers. Price it too low and you’ll leave money on the table. But if you hope for precision, you’ll be disappointed. No pricing formula, expert estimate, or clairvoyant can provide a sales figure that’s exactly “right.” You won’t know how much it is really worth until the day a buyer writes you a check.

Valuation Methods

Even though setting the ideal price is next to impossible, you can arrive at a reasonable asking price, or a price range. Some approaches to pricing a business are:

• Income valuation approach. This analyzes the business’s revenue, assuming that the buyer is looking at a business as just one more type of investment competing with stocks, bonds, real estate, and so on. The question then becomes “What kind of return can the buyer expect?”

• Asset-based approach. This totals up the value of all of the assets, starting with tangible ones such a furniture and including intangible ones, such as trademarks or copyrights. This approach usually uses your assets’ resale value, not how much it would cost to replace them.

• Industry formulas and rules of thumb. There are formulas that may be used in your industry, such as three times your earnings averaged over a three-year period, or two times the book value of your company. These guides can give you a rough idea of the current market, but not much more.

• Comparables. The ideal approach is usually to see what other enterprises similar to yours have sold for — but it works only if such sales have occurred recently. Because small businesses tend to be unique, you’re unlikely to find a recently sold business whose location, sales volume, number of employees, and other factors are the same as yours.

Professional Help

Professional resources you can use in pricing your business include accountants, brokers, appraisers, and educational seminars. Accountants will help you organize and evaluate your financial data. Brokers, besides knowing about potential buyers, may also be able to track down elusive information about sales of comparable businesses. Appraisers can help you set a price for the business or just value your business’s assets.

Naming Your Price

Depending on your business, the low end of your price range will probably be little more than the liquidation value of the assets. The high end is likely to be based on income projections and on what an enthusiastic buyer might pay for the right to receive (and hopefully increase) those earnings in the future. If you have a healthy business — especially one with a well-established customer base and positive reputation — you’ll probably pick an initial asking price towards the top of your range and then, if necessary, be prepared to back off a bit in negotiating.

Several factors that don’t involve the business’s income, assets, or comparables also go into pricing a business. These include:

• terms of payment

• type of buyer

• market demand, and

• your personal needs.

You’ll need to take into account the general economic climate as well as trends in your industry — positive or negative. And, of course, if you have to sell quickly, you may need to settle for less.

Need More Help?

The Complete Guide to Selling a Business, by attorney Fred S. Steingold. guides you through the entire selling process, from setting and negotiating a price, to preparing a sales agreement and going to the closing.

Why Do Businesses Fail To Be Sold? Because Entrepreneurs Find It Difficult To Raise Substantial Amounts of Capital – Part Two

Monday, January 11th, 2010

The Five Most Important Concepts For Your Brokerage Clients To Understand When Raising Capital

1. Understanding the simple fact that raising capital through the issuance of securities, although it may seem difficult in the beginning, is by far quicker, easier, and more effective than seeking capital from institutional sources of capital such as venture capitalists, investment banks, and commercial banks.

2. Understanding that conducting a series of securities offerings will increase the probability of raising substantial amounts of capital for start-up, early-stage and even seasoned companies. Most begin with a “seed” or “development” capital offering of $100,000 to $500,000 before seeking development and expansion capital of $1,000,000 to $5,000,000, if need be. Even companies that have been around a while may need the extra funds to properly register and promote a large offering of securities. The seed capital is used to protect intellectual property by registering trademarks and filing patents, securing property, beginning or continuing R&D, paying for executive and staff salaries, hiring and affording required additional management talent, as well as other important business-building issues. More important, most of the seed capital is spent to enable the company to register or qualify for an exemption from registration under Regulation A for the next securities offering so it can compete directly and publicly for money in the capital markets. You can advertise the registered securities in the general media (primarily newspaper tombstone advertising), which allows you to compete directly with bank CD deposits or other fixed-income securities such as bonds or notes. Most individual investors are looking for income-producing investments through high-yield securities. If you compete on the basis of yield by offering notes, bonds, or preferred stock with higher than average yields you will attract individual investors. This part of the capital market is known as the fixed-income market, which is fifteen times larger than the equity markets. In theory, for every one investor who would buy stock in your company there are fifteen who would buy notes, bonds, or preferred stock in your company.


Where to Find Investors for your Business

Saturday, January 9th, 2010

Investors are defined as “someone who commits capital in order to gain financial returns”. This is very important to understand, why? If you don’t look at an investor from their point of view, you are unlikely to ever have anyone invest in you and your business.

An investor is looking to “gain financial returns” from their investment. They aren’t going to invest money in a business just because the business owner says: “it’s a good idea”, “no one else is doing it”, “I know what I’m going”, or a slough of other commonly heard phrases.

An investor is going to look at several business deals (potentially hundreds or even thousands) before they make an investment. I personally have 5-10 deals come across my desk every week. Everyone has the next greatest business idea that is going to make millions. So if you are looking for an investor you need to set yourself apart from all the other business deals.


Small Business in Deflation

Tuesday, January 5th, 2010

By Jay Fenello

While homes were one of the first classes of property to enter deflation, Small Businesses and Commercial Real Estate are now deflating as well. And for many of the same reasons: people’s expectations of future value have gone down, there’s a lack of financing available, the declining net worth of buyers, rising unemployment, etc.

But there is also one major difference: small business and commercial real estate prices are directly related to the profits that they are expected to generate. If a small business is expected to earn $100,000 a year for its owner, its value is drastically different than the same business if it is only earning $50,000 a year. If a commercial strip center is expected to generate $100,000 a year in profits from lease income, its value is drastically different than the same property if is only generating $50,000 a year in profits.

For a concrete example, two years ago it was common for someone wishing to “buy a job” that generated $100,000 per year in profits to offer $250,000 for the business, paying $50,000 down in cash, and financing $200,000 with an SBA loan. (Note that this value is based on a multiple of 2.5 times cash flow.)

Then the Great Recession began, and small businesses started to suffer. It’s been very common to see gross incomes decline by 20% or more across the board. Because of the high level of fixed costs in a small business (things like rent and utilities), a 20% decline in sales could translate into an 80% decline in profits. The result is that this same business is now only generating $20,000 per year in profits, and would only be worth $50,000 using the same multiple.

But that’s not the worst part. Two years ago, businesses and commercial real estate were selling for premiums. Money was easy, and people were using pro-forma estimates of future earnings to justify higher prices. This was easy to do, because most business were showing a three year trend of improving results. So a buyer looking to buy a business that was reporting $60,000 in profits in 2005, $80,000 in 2006, and $100,000 in 2007, was happy to pay a high multiple on 2007 numbers, because they expected profits in 2008 to be $120,000 !!!

Today, the situation is reversed. Buyers are looking at sales trends that are going down, and they are expecting the down trend to continue again next year. Consequently, they are offering lower multiples, on these lower cash flow estimates.

Going back to our example, instead of offering $5o,000 for the business, today’s buyer may only offer $30,000 instead. Here’s a summary of how this has played out, using our sample company:

Small Business Valuations in the Great Recession

2005 2006 2007 2008 2009
Profits 60k 80k 100k 60k 20k
Multiplier 2.0 2.25 2.5 2 1.5
120k 180k 250k 120k 30k (more…)

Stop Stressing Yourself Out

Tuesday, January 5th, 2010

It’s very common to cause your own stress. Everyone does it. So don’t stress about your stress, learn some valuable techniques to alleviate it. Susan Fletcher, a practicing psychologist and stress management expert has tips to help:

Don’t read into things so much. “Sometimes a look is just a look and a dirty coffee cup is just a dirty coffee cup. It’s not a passive-aggressive way to say you are not appreciated,” Fletcher says. Don’t make things bigger than they need to be—with people or work. Some people make a project bigger than it needs to be in an effort to increase their own value, but they are increasing their own stress as a result.

Learn how to transfer trust. “I really like Stephen M.R. Covey’s stuff from his book Speed of Trust. He says people have to be able to trust before they feel it. Just like with your kids when you give them a little rope. And with someone who works for you, you have to let them fail because failure is feedback,” Fletcher says. “Don’t just say, ‘It’s easier to do myself.’”

Recognize when you are being inefficient. “People who are stressed get stuck answering e-mails for two hours at the expense of higher value items that need to be taken care of, “Fletcher says. “Don’t get lost in inefficient behavior. Ask yourself, ‘What’s my ultimate outcome I want here and what do I need to get there?’”

Find an accountability partner to help you meet goals. “Choose a friend or a family member—probably not someone who lives with you because you don’t want to muddy the waters. It has to be someone you will listen to but who will hold you accountable.”

Say no sometimes. “You have to say no to things you might enjoy, but you are not in line with where you are professionally or personally at the moment,” Fletcher says. Then you can spend your time on what matters to you most.


What you should know to sell your business.

Sunday, January 3rd, 2010


Buyers want proof of the sales and profits that the business has made in the past.


Usually, buyers won’t even look at a business that is not priced competitively.


Buyers will want a complete list of equipment and will inspect it to ensure that everything is in good working order.


Businesses that use a third party evaluation have an 80% chance of selling at a much higher price. Those who do not use a professional business broker and a third party evaluation only have a 17% chance of selling.