Factors That Negatively Impact Business Value

The following are factors that can have a negative impact on the value of a business and some are issues that can rear their ugly head during the due diligence investigative period. Keep in mind that this list is a compilation of potential problem areas and do not apply to all types of businesses.

• Accidents
• New competition in the market
• Changes in technology
• Equipment obsolescence
• Facility obsolescence
• Market shifts
• Declining Revenues
• Poor Financial Records is one of the biggest reasons businesses do not sell or sell at a value considerably less than market value.
• Interest rate flux
• Low margins
• Capital improvements needed
• Lack of Supplier Diversity
• Lack of Customer Diversity - If too much business is concentrated in too few customers, the risk factor is increased. Should one or more of the customers discontinue patronage of the firm, revenues will be seriously impacted.
• Uncollectible receivables
• Low backlog
• Restricted credit
• Regulatory violations
• Environmental Issues are of concern because it is possible that any and all former owners can be held accountable by the government for very expensive cleanup costs.
• Insurance Cost and Availability
• Slow Moving, Outdated and/or Excessive Inventory - These types of inventory tie up money and make the business difficult to sell. Buyers will refuse to buy or will deeply discount the value associated with these types of inventory.
• Obsolete marketing collateral
• Key Staff Leaving
• Poor Property Lease Terms - Not having a lease or being locked into a lease with onerous terms, such as high escalations, detracts from the value of the business. Not having a lease to assign to a buyer runs the risk that the landlord will increase the rent for the new owner. If the rent goes up, the earnings go down and consequently the value of the business goes down.
• Product liability claims
• Patent expirations
• Sales contract expirations
• Cash flow problems

More Buyers Are Looking For Small Business Acquisitions in Houston

Investment groups and baby boomer corporate executives looking to get into action with companies of their own are making small businesses hot prospects these days. Buyers have money to spend and are turning more frequently to the local landscaping company or delivery company as good investments.

There's no question that Houston-area small businesses are becoming more frequent targets for seasoned buyers currently combing the marketplace for investment opportunities. Houston's business-friendly climate is an attractive incentive for these categories of buyers who are more sophisticated about gauging the risks of acquiring small businesses. As a result, they are going after privately-held, well-oiled enterprises with an annual profit of at least $100,000. Manufacturing, trucking, distribution, and service-sector businesses are a few on the list of popular targets.

Proof that the buying spree has heated up in Houston is partly in the growing ranks of business owners consulting with business brokerage firms about the marketability and valuation of their business. Business brokers are intermediaries who assist business owners sell their business in a confidential manner to qualified buyers. They will review the business operations and financial records to advise their clients on what they could expect in the marketplace. They also advise clients of the drivers that add value to a company, how to prepare their business for sale, and help them understand the factors that might impact the net proceeds they could receive from the sale.

More people are looking to acquire profitable small businesses than are available for sale. This is further validation of this surge of acquisition interests in Houston. Our statistics indicate that the ratio of qualified buyers to available target businesses are, on an average, ten to one. It has been our experience recently to have three or four offers on the table within a two-to-three week period of going to market for hot businesses that are properly run, have good financial histories, and are priced right. An increased number of deals are being done with businesses in the $250,000 and up range in annual profits due to these well-capitalized buyers.

This group of buyers is looking to Houston for small business acquisitions because the future economic outlook in Houston is one of the most promising in the nation. "The Houston economy is the talk of the town in the rest of the country," according to the Wells Fargo February 2007 Texas Economic Report and the Census Bureau April report "predicts the continuing growth of the city." The Houston Chronicle also reported on this buying surge mirrored in the real estate sector. This same group of investors is buying up downtown buildings and real estate in many other areas of Houston. Furthermore, unemployment rates in Houston are at the lowest level in seven years. The fuel that is firing this robust job market is small business growth and expansion.

Because of our daily interactions and relationships with Houston's small business owners and our receipt of buyer inquiries from across the U.S. who want to be part of the commerce engine in our market area, we are barometers that measure the pulse of the local economic climate of the small business community. Of note is that we have many more investment and strategic buyers and high net-worth individuals in our database of prospective buyers these days who are searching for acquisitions in Houston.

Since small business is under the radar of investment groups, these groups need to connect with available acquisition candidates through business brokers in the city. The growing phenomenon of corporate boomers who want to buy existing businesses is a trend we see firsthand through the increased level of inquiries from this category of buyer as well. We are seeing the first ripples right now. These individuals are healthy, wealthy and wise and have business acumen. They typically have resources to invest in business ventures, and they have the energy and long-term vision to be successful. Business brokers assist them through the process of how to purchase a small business and explain the approach that is needed to reach their goal.

Small business owners who are pondering the possibility of selling should consider a number of things. Among them and of major importance is not to procrastinate. If you are waiting for a sign to tell you the time is right, well this is it. Economic conditions in Houston are still ripening and the wave of buyers is not yet at full swell. You don't want to wait until these trends are on the downside of the bell curve. This competitive environment makes it a seller's market. A business brokerage firm can provide all the resources needed to assist in the decision-making process through the final sale if the decision leads to the business-selling path.

One thing that investment groups and corporate executives might not recognize and has been one of the barriers to successful deals is that much of the value owners of small businesses derive from the business isn't financial. It's something they get out of it on which one cannot put a price. It's what the business adds to the personal life of the owner. This is the difference between acquiring public corporations or companies that have hundreds of employees versus a privately-held smaller businesses. It's the human element, the emotional personal attachment the owner has to his or her business, his employees and customers. If these buyers understand this factor, the chances that negotiations will go well and a deal consummated is much improved.

Houston Small Business Owners Confident In Current Economic Climate

Administaff Announces Results of Business Survey and Compensation Data HOUSTON--(BUSINESS WIRE)

Nearly 86% of small business owners say their companies are either growing as predicted or at a faster pace than forecasted, according to a Business Confidence Survey released May 8, 2007 by Administaff, with Headquarters located in Houston and a leading provider of human resources services for small and medium-sized businesses.

Most of the companies – 81% – said they were positive about business conditions for the remainder of 2007, with 46% saying they plan to hire more new employees this year than they added in 2006. To fill positions, 52% said they are hiring full-time employees, while 16% said they planned to hire part-time workers.

Administaff also released compensation data compiled from its client base of more than 5,700 small and medium-sized businesses throughout the country. A comparison of first-quarter data against the same period in 2006 shows that average compensation is up 6.6%.

“It’s clear from the survey results and compensation data that owners of small and medium-sized businesses across the nation are upbeat about the current business climate despite the reported slowdown in economic growth that made the headlines recently,” said Paul Sarvadi, Administaff’s chairman and chief executive officer. “Their optimism is refreshing. It’s the sort of confidence that fuels this country’s economic engine and boosts employment.”

Other highlights of the survey:

Companies are filling gaps in their workforce from a combination of sources: 52.4% are hiring full-time employees; 41% make do with same staff; 24% rely on outsourcing; 18% pay overtime; 17% hire temporary employees; and 16% hire part-time employees. Only 13% plan to hire fewer employees this year compared to 2006.

Despite their positive outlook, employers are still grappling with a number of business challenges. Fifty-eight percent said the biggest issue they face this year is “hiring the right new employees,” while 40% said the cost of medical coverage/insurance was a major concern.

Other issues cited by respondents were as follows:

• Increased business competition
• Employee retention
• High cost of fuel
• Regulatory compliance
• Immigration issues

Most of the respondents expressed confidence in the current business climate. “Even though we are a little behind projections, we are moving forward with expansion plans by opening at least two new offices and hiring at least eight new associates during the year,” said one business executive. Another wrote: “We are looking forward to an outstanding year, which will ultimately elevate employee morale and reinforce company stability.”

About the Business Confidence Survey

Respondents to the Administaff Business Confidence Survey are among the small and medium-sized companies Administaff serves throughout the country. The questions were designed to take the pulse of the small-business community and gauge the expectations of business owners through the remainder of 2007. Administaff conducted the survey in late April over a three-day period. Researchers surveyed chief executive officers, chief financial officers and other executives in a variety of industries at its client companies across the United States.

Houston and The Realignment of America

The Wall Street Journal had a quite long and comprehensive op-ed a couple of days agao titled "The Realignment of America" on demographic shifts since 2000. While getting the link, I also noted it has been one of the most popular - and the most emailed - stories that day at WSJ. The graphic is pretty cool, and makes it look like everybody is headed to Texas (or maybe Arkansas?).

He analyzes the top 50 US metros, and puts them into four categories:

Start with the Coastal Megalopolises:

New York, Los Angeles, San Francisco, San Diego, Chicago (on the coast of Lake Michigan), Miami, Washington and Boston. Here is a pattern you don't find in other big cities: Americans moving out and immigrants moving in, in very large numbers, with low overall population growth....

This is something few would have predicted 20 years ago. Americans are now moving out of, not into, coastal California and South Florida, and in very large numbers they're moving out of our largest metro areas. They're fleeing hip Boston and San Francisco, and after eight decades of moving to Washington they're moving out. The domestic outflow from these metro areas is 3.9 million people, 650,000 a year. High housing costs, high taxes, a distaste in some cases for the burgeoning immigrant populations -- these are driving many Americans elsewhere.

The result is that these Coastal Megalopolises are increasingly a two-tiered society, with large affluent populations happily contemplating (at least until recently) their rapidly rising housing values, and a large, mostly immigrant working class working at low wages and struggling to move up the economic ladder. The economic divide in New York and Los Angeles is starting to look like the economic divide in Mexico City and São Paulo.

Democratic politicians like to decry what they describe as a widening economic gap in the nation. But the part of the nation where it is widening most visibly is their home turf, the place where they win their biggest margins (these metro areas voted 61% for John Kerry) and where, in exquisitely decorated Park Avenue apartments and Beverly Hills mansions with immigrant servants passing the hors d'oeuvres, they raise most of their money....

You see an entirely different picture in the 16 metro areas.

I call this category the Interior Boomtowns (none touches the Atlantic or Pacific coasts). Their population has grown 18% in six years. They've had considerable immigrant inflow, 4%, but with the exceptions of Dallas and Houston, this immigrant inflow has been dwarfed by a much larger domestic inflow -- three million to 1.5 million overall.

Domestic inflow has been a whopping 19% in Las Vegas, 15% in the Inland Empire (California's Riverside and San Bernardino Counties, where much of the outflow from Los Angeles has gone), 13% in Orlando and Charlotte, 12% in Phoenix, 10% in Tampa, 9% in Jacksonville (doesn't it touch the Atlantic coast?). Domestic inflow was over 200,000 in the Inland Empire, Phoenix, Atlanta, Las Vegas and Orlando. These are economic dynamos that are driving much of America's growth. There's much less economic polarization here than in the Coastal Megalopolises, and a higher percentage of traditional families: Natural increase (the excess of births over deaths) in the Interior Boomtowns is 6%, well above the 4% in the Coastal Megalopolises.

The nation's center of gravity is shifting: Dallas is now larger than San Francisco, Houston is now larger than Detroit, Atlanta is now larger than Boston, Charlotte is now larger than Milwaukee. State capitals that were just medium-sized cities dominated by government employees in the 1950s -- Sacramento, Austin, Raleigh, Nashville, Richmond -- are now booming centers of high-tech and other growing private-sector businesses. San Antonio has more domestic than immigrant inflow even though the border is only three hours' drive away. The Interior Boomtowns generated 38% of the nation's population growth in 2000-2006....

What about the old Rust Belt, which suffered so in the 1980s?

The six metro areas here -- Detroit, Pittsburgh, Cleveland, Milwaukee, Buffalo, Rochester -- have lost population since 2000. Their domestic outflow of 4% has been only partially offset by an immigrant inflow of 1%. If the outflow seems smaller than in the 1980s, it's because so many young people have already left. Natural increase is only 2%, lower than in Orlando or Jacksonville in supposedly elderly Florida. Their economies are ailing, more of a drag on, than an engine for, the nation. They're not the source of dynamism they were 80 or 100 years ago....

The fourth category is what I call the Static Cities.

These are 18 metropolitan areas with immigrant inflow between zero and 4%, with domestic inflow up to 3% and domestic outflow no higher than 1%. They seem to be holding their own economically, but are not surging ahead and some are in danger of falling back. Philadelphia makes the list, and so do Baltimore, Hartford and Providence in the East. Surprisingly, some Western cities that boomed in the 1990s are in this category too: Seattle (the tech bust again), Denver, Portland. In the Midwest, Minneapolis, St. Louis, Cincinnati, Kansas City, Columbus and Indianapolis are doing better than their Rust Belt neighbors and make the list.

In the South, Norfolk, Memphis, Louisville, Oklahoma City and Birmingham are lagging enough behind the Interior Boomtowns to do so. Overall the Static Cities had a domestic inflow of just 18,000 people (.048%) and an immigrant inflow of 2%....Twenty years ago political analysts grasped the implications of the vast movement from Rust Belt to Sun Belt, a tilting of the table on balance toward Republicans; but with California leaning heavily to Democrats, that paradigm seems obsolete. What's now in store is a shifting of political weight from a small Rust Belt which leans Democratic and from the much larger Coastal Megalopolises, where both secular top earners and immigrant low earners vote heavily Democratic, toward the Interior Megalopolises, where most voters are private-sector religious Republicans but where significant immigrant populations lean to the Democrats. House seats and electoral votes will shift from New York, New Jersey and Illinois to Texas, Florida, Georgia, Arizona and Nevada; within California, House seats will shift from the Democratic coast to the Republican Inland Empire and Central Valley. I've noted before that Houston is one of the few top mega-metros still growing and attracting substantial domestic AND international immigrants, which is part of what makes us such a dynamic, diverse melting pot of opportunity. Really a fascinating time to be here and watch all the change.

I planned to write an article about this WSJ Op-ed piece until I came across Tory's. So, with permission I borrowed this post from Houston Strategies Blog: Tory Gattis. Thanks Tory.

Boomers vs. Gen Y Business Owners -- Survey by Amex

We report on economic conditions and other issues that affect the Small Business Community and its future outlook. This survey is important because it is essentially an interview with the generations that hold, in their hands, the future impact of small business on our economy. The outlook is encouraging.

Let's preface the Survey with why Small Business is so important to our economy.

• Small Businesses make up 97% of America's exporters and produce 26% of all export value. (Fred Smith, FedEx Corp. CEO May 2006)


• Small Businesses employ 50 percent of the country's private sector workforce (U.S. SBA June 2006)


• Small Businesses have generated 60 to 80% of net new jobs annually over the last decade (U.S. SBA June 2006)


• The estimated 25.8 million Small Businesses in the United States represent 99.7% of all employer firms. (U.S. SBA June 2006)

In a Head-to-Head Match-Up Generations Agree Experience Gives Boomers the Advantage in Business; Gen Y More Passionate but Baby Boomers More Energetic.

Baby Boomer and Generation Y entrepreneurs share optimism about the economy and confidence in their ability to succeed in business, according to the OPEN Ages survey from OPEN from American Express®, a new survey examining the attitudes of Baby Boomer and Generation Y business owners. Large numbers of Generation Y and Baby Boomer business owners are optimistic about the U.S. economy over the next year (64% and 62%, respectively), and most are certain that the decision they made to go into business was the right one, with Baby Boomers being the most assured (90% vs. 76%). Passion, rather than money, fuels the success and entrepreneurial drive of both generations, Generation Y and their parents' generation, the Boomers.

"Small businesses are responsible for 60 to 80 percent of the net new U.S. jobs created annually over the past decade," said Susan Sobbott, president, OPEN from American Express. "It is good news for the economy when both the established generation and the generation representing the future of small business are optimistic about economic growth and their own success."

The two generations diverge, however, on a host of issues from career influences, risk-taking and serial entrepreneurship. More Generation Y owners say 'having fun is a priority in my business' (75% Generation Y, 66% Baby Boomers), and Generation Y also has more trouble letting go. According to the OPEN Ages survey, Generation Y business owners are more likely to find it 'very difficult' to leave their work to go on vacation (39% vs. 26%). They are also more likely to put in the long hours - 10 or more hours a day (66% Generation Y vs. 58% Baby Boomers), and less likely to describe their business culture as 'casual or relaxed' (66% Generation Y vs. 77% Baby Boomers). Surprisingly, Boomers also report having more natural energy than their younger peers (60% vs. 50% Generation Y).

Passion is the Primary Motivator; Money is Down the List

Passion is the leading driver for both Generation Y and Baby Boomers in starting their businesses (55% Generation Y, 40% Baby Boomer), followed by the perception that they are "natural" or "born" entrepreneurs (35% Generation Y, 37% Baby Boomers). Money was not an important factor for either generation (18% Generation Y, 14% Baby Boomers), and is less of a source of satisfaction than family and friends, their own independence, and personal accomplishments.

In the area of risk, nearly three quarters of Generation Y entrepreneurs (72%) say they like to take risks compared to just over half of Baby Boomers (53%). Fifty-nine percent of Generation Y believes they take more risks than the average person compared to 50% of Baby Boomers. Generation Y is almost twice as likely as Baby Boomer small business owners (59% vs. 33%) to be or plan to be 'serial' entrepreneurs, owning or planning to own more than one business. Among this generation, men take the lead for serial entrepreneurship with two-thirds owning or planning to own more than one business (67% vs. 46% of women).

Working Harder to be Their Own Boss

Valuing their independence, Baby Boomers and Generation Y business owners are both prepared to work more in order to be their own boss. On average both groups spend 10 hours per day working on business, and typically conduct some type of business activity 6 out of 7 days.

Generation Y entrepreneurs are more likely to have started their business right out of school (27% vs. 9% for Baby Boomers). They are also more likely to look to their parents' experiences as life-shaping influences, with 55% citing their fathers' work experiences as a factor in starting their own business vs. 44% Baby Boomers. According to the survey, many Baby Boomers (26%) started their business because they were financially unable to retire.

Societal Concerns Shape Small Business Decisions

There is broad agreement across the generations on key issues directly affecting small businesses, including the net benefits of free trade (72% Gen Y, 69% Baby Boomers) and the use of private investment accounts to save Social Security (72% Gen Y, 62% Baby Boomers). Surprisingly, the majority of both generations agree that raising minimum wage would not hurt small businesses (60% Generation Y vs. 58% Baby Boomers).

The generations differ, however, on the benefits of immigration. Fifty-two percent of Generation Y believes that immigration is beneficial to the economy compared to only 44% of Baby Boomers.

Experience Trumps Technology for Business Success

Despite Generation Y's perceived greater ease with technology-- two-thirds (66%) of Generation Y entrepreneurs consider themselves tech savvy compared to less than half (47%) of Baby Boomers--both age groups agree that experience trumps tech savvy in terms of business success. More than half (59%) of Generation Y think that older entrepreneurs have an edge based on their years of experience, and the vast majority of Baby Boomers agree (88%).
Nonetheless, Gen Y owners are more likely to agree that 'technology is vital to my business' (86% vs. 76% Baby Boomers) and that 'technology is vital to my personal life' (69% vs. 54%). Despite some discrepancies over the importance of technology in their lives, both age groups agree that 'it is important to disconnect from technology during parts of their day' (71% Gen Y, 74% Baby Boomers). More than half of small business owners in both generations believe that 'technology intrudes on their personal life, but benefits their business' (56% Gen Y, 58% Baby Boomers).

Different Media Influences

Each generation favored unique preferences for news and information sources that shape their decision making. Baby Boomers, not surprisingly, are most likely to get their news from traditional sources such as television (50% vs. 27% Generation Y) and newspapers (19% vs. 6% Generation Y). Generation Y owners are more likely to get their news from the Internet (31% vs. 9% Baby Boomers) and word of mouth (12% vs. 3%). Generation Y entrepreneurs are also more likely to start a blog to discuss their business (8% vs. 1%).

Survey Methodology

The OPEN Ages Survey, released for the first time this spring, is based on a nationally representative sample of 602 small business owners of companies with fewer than 100 employees. Half of these owners are from Generation Y (ranging in age from 18-29) and half are Baby Boomers (ranging in age from 42-64). The survey was conducted via telephone by International Communications Research from March 8-March 23, 2007.

Read the entire Press Release

Selling A Business? Use A Team Of Professionals

The likely team of experts will usually consist of a business broker, an attorney, and an accountant.

Once an owner has decided to sell the business, he or she needs to determine who will handle the process. Utilizing professionals to facilitate the process is key to successfully selling the business within the shortest time frame for the most favorable price in the optimal confidential environment.

The Business Broker

A business brokerage firm can add value to your business during its sale as the captain of the team. They provide services such as valuing the business, preparation of a marketing package that describes the attributes of your business, confidentially finding and screening prospective buyers, providing advice regarding market trends and the marketability of your business, assisting in the negotiations, and coordinating the sale process between all the parties to the transaction. A business broker's creative transactional skills and experience in closing thousands of business sales often makes the difference in being able to put a deal together. Their business is selling businesses. Period.

Any given business owner may be great at distribution, running a restaurant, or manufacturing widgets. But even though they are successful in their chosen field, they don't do themselves justice when they opt to sell by themselves because they've never done it before. Selling a business is not like selling a product or real estate. Privately-held businesses are sold in an environment that is unlike the selling environment of anything else you can imagine! Read This Article That Explains Why.

Legal Counsel

An attorney can review legal documents and provide legal advice that will protect your rights and keep you from having legal problems after the sale. They are instrumental in drawing up documents, such as noncompete contracts, that may be part of the purchase agreement. They should also be used to clear up any outstanding legal issues that your business may have so that it does not reflect badly in the eyes of the buyer.

Accountant / CPA

An accountant can get your financial records in order, help explain the financial records to the buyer and his advisers, and help you understand the tax consequences of a sale. Poor financial records is one of the biggest reasons businesses do not sell or sell at a value considerably less than market value. Hire competent accounting help and keep your financial records current. Report all income. We all know how to be creative when it comes to expenses, but if the total sales are not properly reported, earnings cannot be verified except through observation. If a buyer needs to obtain outside financing, financial institutions are not going to rely on observation. They want to see financial statements that reflect all of the sales and operating expenses.

Professional advisers can make or break a deal. A Seller must articulate his wishes to his team of advisers in order to have them working together towards a common goal. Each adviser, such as a BUSINESS BROKER, an ATTORNEY or an ACCOUNTANT, has a specific role in the transaction and should be working on behalf of their client -- you the Seller -- to achieve the objective for which you engaged them.

Selling Small Businesses - What Is Your Business Worth?

When it comes time to sell your business, knowing how to enhance its value and PLANNING AHEAD are key to doing it ON YOUR TERMS.

Selling a business can be complicated and very time consuming. Since the average business sale transaction takes anywhere from FOUR TO TWELVE MONTHS, business owners need to be in the right frame of mind when they embark on the process. A big mistake that is often made is not planning well enough in advance to optimize its value and not having a STRATEGY FOR EXIT.

THE CONCEPT OF VALUE

The concept of value was set forth as early as the first century, B.C., when Publilius Syrns wrote his Maxim 847: "Everything is worth what its purchaser will pay for it," or as an early British economist, Samuel Bailey wrote in 1825, "Value, in its ultimate sense, appears to mean the esteem in which an object is held." So, a closely held business may have a high value to its owner resulting from the efforts expended to build it, but it may have a lower value to a potential buyer who may be more interested in return on investment than past efforts of the Seller.

Thus, a proper valuation of a business will result from a dispassionate analysis of the firm's objective and subjective factors such as: the firm's financial condition, future income and expense risk factors, market and industry considerations, management and marketing functions, and the perceived esteem with which the business is held by its industry.

VALUATION METHODS

Two methods commonly used by BUSINESS BROKERS to determine fair market value of privately-held businesses are the Multiple Method and the Discounted Future Benefits Method.

Multiple Method

The most viable valuation method for small businesses is the multiple method. This formula applies a multiple factor to the previous year or current year projected Discretionary Earnings figure to arrive at a purchase price. The Discretionary Earnings figure is a combination of several factors:

Seller Discretionary Earnings (SDE) = Pre Tax Profit + Owner's Salary + Additional Owner Perks + Interest + Depreciation + Adjustments for One-Time Events. Note: Net working capital and real estate would be additive values.

Typically, small businesses will sell in a range of one to four times multiple of this figure. This is a wide range, so how do you determine what to apply? In general, a one to two times multiple is for those businesses where the seller is "the business" or is "a one-man show." In other words, if the seller leaves, so too can the customers. Businesses with declining revenues, and high-risk businesses, such as restaurants, are in the one to two-and-a-half times multiple range. Three to four times multiple is for businesses that have been around for several years, have shown sustainable growth, have a solid base of clients, assets that will not have to be replaced in the immediate future, are involved in growth industries, and have expansion possibilities. Of course, there is a lot more to factor into the equation such as current economic and market conditions and the CATEGORY OF BUYER that the business will bring.

Examples of Positive factors that raise multipliers include:

aProprietary products, with strong brand and/or patent or trademarkaDiversified customer base - no one customer more than 10% of sales aStrong management teamaWeak competitors and a healthy market share for your companyaProducts that are early in the Product Life CycleaAbility of the company to meet some growth with current plant and equipmentaNo pending legal or government actionaFinancial ratios that are near or above industry averages aand these OTHER POSITIVE ASPECTS

Examples of Negative factors that lower multipliers include:

aProducts that are just like competitors aOne or a few customers make up more than 25-30% of sales aStrong competitors and a weak or declining market share for your company aProducts that are near the end of the Product Life Cycle aMajor investment needed soon in plant and equipment aPending legal or government action aFinancial ratios that are below industry averages aand these OTHER NEGATIVE ASPECTS

About the factors listed above ---if your company has one, or even a few, of the negative factors --- you are typical! There is no perfect business, but buyers will use these factors to negotiate the price down. You should address POSSIBLE PROBLEM AREAS and outline how the negatives can be overcome by a new owner. Buyers will look at the price of the business and determine if they can make sufficient profits to earn a livable salary, pay the new debt service, and provide a reasonable return of their investment. Ultimately, this is the test to see if the price and terms of any deal are reasonable.

Discounted Future Benefits Method

When forecasted future earnings can be reasonably developed, then the Discounted Future Benefits Method is often preferred by some buyers. This method utilizes one of several forms of forecasted after tax earnings over a period of five to 10 years. These earnings are then converted into a value using a present value concept. This method is more applicable to larger businesses that have stable or predictable earnings. Buyers often expect a 25% to 35% rate of return from an acquisition.

Buying a Business? 14 Common Business Buyer Mistakes

The following is a discussion of fourteen common mistakes made by first-time or novice Buyers in their search for a business to purchase. Use this checklist to help you from making the same wrong moves.

(1) Inadequate Assessment of Capital Resources
When a business broker attempts to QUALIFY A NEW BUYER in terms of his financial resources, the primary Buyer capabilities of interest are:

• cash on hand available for a down payment
• additional funds available for working capital
• credit or borrowing capacity

From experience, brokers recognizes the necessity of having a reserve of funds for working capital including, operating costs, transition costs, changes desired by the Buyer after purchase, additional advertising and a safety margin. The BUYER'S ASSESSMENT of his financial resources should be made prior to searching for a business to buy in order to FOCUS HIS EFFORTS on acquisition candidates that fit his financial capabilities.

(2) Unrealistic Expectations
Owning your own business is “the American Dream.” To convert this dream into reality the Buyer must have a practical perspective. It is not realistic to expect to invest $10,000 or $15,000 and earn a first year profit of $100,000. It is not realistic to acquire an established company with a growing customer base, numerous employees, and assets – and expect to be an absentee owner. Yet the above are true examples of Buyer misconceptions. As you continue to collect information, ask questions, read and pursue specific business opportunities, you will begin to gain a feel for the market. This could take from one month to six months for a full-time Buyer or over a year for someone investigating businesses on a part time basis.

(3) Not Asking the Right Questions
Know what questions to ask when meeting with Business Brokers and Business Owners. A Business Broker will help you understand the process of buying a business and, after a standard pre-screening procedure, will provide you with the information you need to determine your level of interest in a given business. The Seller too, from your first meeting, should be candid and open in answering your questions unless they would prematurely reveal trade secrets or proprietary business information.

(4) Not Understanding Or Following The Correct Steps
Many Buyers begin having problems when they don't understand THE STANDARD STEPS in the process of buying a business. Each step has a specific purpose and sequence, which when followed will save all parties -- Buyers, Sellers, Brokers, professional advisors -- time, effort and money.

(5) Using a Haphazard Business Selection Approach
Beginning Buyers can easily fall into the trap of trying to investigate and pursue every business currently on the market at the same time. The logic behind this approach is: “If I see enough businesses, I’ll eventually recognize what I’m really looking for.” Unfortunately, this scattered and unfocused method seldom works at all and the excessive time and effort it requires quickly burns out the Buyer, and the business broker, for that matter. Again, by following the correct SEQUENCE OF EVENTS, the Buyer can gain direction and channel his efforts towards those business opportunities most suitable to him.

(6) Buying On Emotional Reasons Rather Than Sound Business Decisions
It’s quite possible to find yourself falling in love with a business. This, in itself, is not necessarily harmful. In fact, it’s important that you can feel an attachment to the business you’re buying. However, the danger is in allowing your infatuation to blind you to the economic realities of the business. Follow the proper guidelines and PERFORM DUE DILIGENCE in order to make a measured business decision. This decision should be based on a realistic assessment of both the positive and negative expectations of the business, while allowing for an acceptable level of risk.

(7) Communications With the Seller
The Buyer should understand that Sellers list their companies with professional business brokers because they realize that they don’t have the personality, temperament , or time to deal with a wave of potential Buyers. The Business Broker is the buffer between the two principals and facilitates communicate allowing a calm, smooth negotiation process to occur.

(8) Inability to Negotiate
When a business for sale is listed at a very reasonable fair market value and would be an excellent purchase at the listed price, the Buyer still believes a lower price must be negotiated in order to get a good deal. The Buyer cannot justify in his own mind paying the full asking price even though it may be an excellent acquisition. In our everyday lives, practically everything we purchase has a price tag and we simply pay the stated price. We are not conditioned to negotiate the price we pay for our groceries, for example, nor is it acceptable. However, when attempting to purchase a business, which is perhaps the most important financial decision of our life, we expect to be able to negotiate a low-down, bargain price. Unfortunately, we may not have the experience, skill or temperament to negotiate at all. Those Buyers unwilling or unable to negotiate for themselves would do well to seek the assistance of experienced advisors because it is successful NEGOTIATION that gets a deal done.

(9) Failure to Have All Agreements in Writing
Both Buyer and Seller should recognize the benefits of a WELL-DOCUMENTED TRANSACTION which is truly in the best interests of all parties. Whenever possible, every major agreement, understanding or obligation of the parties should be clearly defined in mutually agreeable language, signed or initialed, dated and retained for future reference.

(10) Misinterpretation of Financial Information
Many Buyers make the mistake of spending a great deal of time collecting massive amounts of data on the business and little time trying to interpret what they have collected. If a Buyer does not understand such things as cash flow, add backs, recasting, owner’s draw, or debt service, he should make himself knowledgeable in each of these important areas and seek the assistance of a transaction-experienced accountant.

(11) Failure to Verify Business and Financial Data
Another common mistake of many Buyers is to blindly rely on verbal statements and claims made by the Seller or his agent, without verifying their accuracy or validity. One Buyer, who made an offer on an Italian restaurant, relied on the Seller’s opinion that the neighborhood road construction project would be completed within 60 days. A couple of follow-up phone calls would have revealed that the project was not scheduled to be completed for another 8 to 10 months. Had the Buyer realized this fact prior to buying the business, he could have negotiated terms which would have reduced his debt service payments to the Seller and thus, improve his cash flow position during his first year of operations. Once again, verification and follow-up is the responsibility of the Buyer and this is the purpose of the due diligence phase.

(12) The Misuse of Professional Advisors
Professional advisors includes attorneys, accountants, business brokers, bankers, as well as any other experienced consultant qualified to assist the Buyer. There is often a tendency on the part of new Buyers to misuse professional advisors. Some inexperienced Buyers make the mistake of neglecting to seek any third party professional assistance. Unfortunately even the simplest transaction can become complicated overnight, which results in confusion and disagreement leading to the eventual loss of time and money for all parties. Other inexperienced Buyers find themselves overly relying on professional advisors even to the extent that they may refuse to make any decision or take any action without the pre-approval of the advisor. Some common sense tips to remember when working with advisors:

• The advisor works for you and should provide support and counseling to help you reach your objectives.
• Seek advice from professionals in their own area of expertise only. Don’t seek detailed tax advice from a banker or market value advice from an attorney.
• Supply your advisors with pertinent, factual information upon which they can give you sound advice.
• Don’t expect anyone else to decide whether a business is a good deal or RIGHT FOR YOU, as this is a decision only you can make.
• Don’t seek professional advice prematurely. For example, don't hire an accountant to do extensive research on the potential tax consequences of a business acquisition before the business has been investigated and a tentative agreement has been reached.

(13) Over Deliberations and Indecisiveness
In their sincere efforts to avoid making a mistake or jeopardizing their family’s savings, many novice Buyers will often defer making any decision on a potential business purchase. Their logic is “if I’m meant to get the business, I’ll some how get it. If not, then it was not meant to be.” Unfortunately, these Buyers are allowing fate to control their destinies. Those unable to ever make a decision and take action would probably be wise to avoid attempting to buy a business altogether, because SUCCESSFUL OWNERSHIP REQUIRES the ability and willingness to make decisions and accept risks on a daily basis.

(14) Letting Advisors Kill the Deal
Professional advisors can make or break a deal. Buyers must articulate their wishes to their team of advisors in order to have them working together towards a common goal. Each advisor, such as an ATTORNEY or an ACCOUNTANT, has a specific role in the transaction and should be working on behalf of their client -- you the Buyer -- to achieve the objective for which you engaged them.

Buying or Selling a Business? What is the CPA's Role?

Whether you are buying or selling a business, your accountant can make or break the deal.

If you choose to engage advisors, such as a CPA, to assist you in the sale or purchase of a business, it is important that they be deal friendly and transaction experienced. They must have a clear understanding of your objectives and seriousness in getting the transaction completed. In many instances, the sale of a business fails to close because of a CPA's actions or lack thereof.

For instance, the buyer's accountant makes too many demands of the seller due to the lack of understanding of the due diligence process or the documentation that should typically and reasonably be provided by the seller. Certainly, you want your accountant to look out for your interests, but not to the point where the demands are so strenuous that the other party walks away from the deal.

The failure of the seller's accountant to provide financial records and information in a timely manner to the buyer is another way to kill a deal. In general, the reason for delayed responsiveness in delivering requested documents is that the accountant views the sale of the business as losing a client. However, if the accountant is timely, helpful, and knowledgeable in regards to the financial aspects of the business, the new owner will look at the accountant in a positive light and is more likely to be asked to continue servicing the business when the new owner takes over.

A seller's accountant's lack of understanding of the tax implications of a business sale is also one of the reasons that a business sale can die. If tax issues are not understood, the deal will not be structured to minimize the tax liabilities of the seller. You don't want to be in the middle of a transaction with a solid buyer and discover that the tax implications of the sale are going to net you much less than you had figured. By structuring the transaction beforehand and properly addressing tax matters, the seller can maximize much-deserved profits.

How your business is legally formed can be important in determining your tax status when selling your business. Is your business a corporation, partnership or proprietorship? If you are incorporated, is the business a C corporation or a sub-chapter S corporation? In addition, there are some tax rules that impact certain businesses on seller financing. The point to be made here is before you consider price or even selling your business, it is important that you discuss the tax implications of a sale of your business with a tax advisor that is experienced in business transfer transactions. A business broker will be able to recognize potential problems and can refer you to tax professionals if you don't already have one that is experienced in tax issues related to business transfer transactions.

The buyer, seller, and their advisors involved in the transaction must have a shared understanding of the price and terms of the deal.......who is getting what and for how much......or the sale may be doomed before it starts. To help prevent wrecked deals, good communication between all of the parties involved is a priority. Unless they are told, outside advisors may not realize how much the buyer and the seller want to consummate the sale. The accountant needs to know from the client that this is an earnestly desired transaction and that, unless something completely unanticipated is discovered, his or her job is to provide, review, and verify the financial records of the business in order to get the deal done.

If there is no one monitoring and leading the progress of the transaction, the ball can be dropped somewhere along the way. The use of a professional business broker can alleviate communication problems and keep the ball rolling. The broker's role at this point in a business transfer transaction is to act as the intermediary. The business broker--having been through the process many times, much more often than any of the attorneys or other advisors involved--knows the pitfalls. They keep the deal on track and act as the captain that keeps the team working together towards the common goal.......the successful consummation of the sale. As long as all advisors involved are operating on the same wave length as their respective clients -- the buyer and the seller -- the odds are good that the deal will happen.