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From the category archives: Certified Business Brokers News

Business valuations can be derived numerous ways. Our experience on the buyer and seller sides of business transactions gives Certified Business Brokers that competitive edge.

Value Driver #9: Barriers to Competitive Entry (Business Moat)

Circumstances that give a business an advantage over its competitors, strengthen its strategic position, or can be leveraged for future gain boosts business value. Why? Because it increases the probability of the continued future profitability of the business and decreases perceived risk by prospective buyers.

As with all value drivers, it’s about risk. Lower risk achieves higher value. Buyers will pay a premium price for a business that has barriers to competitive entry.

One way to describe this Barrier Value Driver is to use Warren Buffet's term, "Business Moat."  Buffet compares a castle's moat to the protection that a business needs to ward off encroaching competitors. The wider the moat, the more easily a company can be defended and the longer it can protect its profits. A company with a narrow moat does not offer these protections.

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The Difficult Issues Often Attached To Valuing A Business

There is little doubt that valuing a business is often complex.  In part, this complexity is due to the fact that business evaluation is subjective.  The simple fact is that the value of a business is often left to the mercy of the person conducting the evaluation.  Adding yet another level of complexity is the fact that the person conducting the valuation has no choice but to assume that all the information provided is, in fact, correct and accurate.

In this article, we will explore the six key issues that must be considered when determining the value of a business.  As you will see, determining the value of a business involves taking in several factors.

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Own The Property? How Is The Real Estate Handled When Selling Your Business?

No matter how the real estate is held, many owners desire to sell the real estate with the business. There's only one problem. Many buyers that will want to acquire your business will not have the capital to also acquire the real estate.  Or they may feel that parking a significant investment in real estate makes a large portion of their investment capital unavailable for growing their new enterprise.  The ideal scenario that creates the largest buyer pool is for the seller to offer the real estate for sale or for lease at the option of the buyer.

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What Drives The Value of a Restaurant?

The valuation of a restaurant is much like any other business valuation. But, there are certain factors unique to the restaurant industry. The universal drivers for many restaurants are pretty simple: quality, hospitality, consistency, value, cleanliness, and customer loyalty. 

You may have heard the saying that the three most important ingredients for a successful business are location, location and location. Obviously, there are other factors which are very important as well, but you cannot compromise on location.

In a 2005 publication of Cornell Hotel and Restaurant Administration Quarterly, the authors noted how successful owners were able to describe their concepts - and why people like it - in great detail - those unique reasons why people choose their restaurant over their competitor.

1. Location, Location, Location

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How Goodwill Impacts Business Value

Identifying and articulating the goodwill in your business can have a significant impact on buisness value. Essentially, goodwill is the life force of the business. Tangible assets are just “stuff."

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Master Ten Value Drivers to Sell Your Business at the Highest Price

Evaluate your company through the eyes of a buyer. Master these ten value drivers and sell at the higher range of the multiples normally associated with your industry.

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Buying a Business - What is the Value of Goodwill for a Buyer?

Since the biggest part of the purchase price of a profitable small business is goodwill, it is important for a buyer to have knowledge and understanding of just what goodwill is and why there is value in it. Much of the value of a business is not to be found in its hard assets such as the fixtures and equipment, but in the intangibles that create the income. A simple way to describe goodwill is the difference between the current market value of the tangible assets of the business and the total value of the business.

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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 Restricte ...

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Reliable Financial Data Is A Top Driver Of Business Value

The lack of financial integrity is one of the most common hurdles encountered during the process of selling a small business. What is being bought or sold is primarily a future stream of income. Not the assets or property of the business, but the income these assets will generate in the future.

Since future income is impossible to definitively compute and hard to estimate, the company's financial history, at least, provides concrete facts and insight to future performance. So, reliable financial records are not only a critical element of business management but also support the business' historic profitability, operational efficiency, and its solvency.

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Recasting Financial Statements: A Crucial Step In Preparing Your Business For Sale

Financial statements and tax returns for most privately-held businesses are prepared for tax purposes, not for business sale purposes. The objective of business owners and their financial advisors is to use all available accepted accounting methods to minimize taxable net income. This is effective for minimizing taxes, but may paint an incomplete picture for business valuation purposes….and for showing the company’s true profitability to a potential buyer. The goal when presenting financial information to a potential buyer is to maximize net income by clearly outlining the owner benefits, net income, and cash flow of the business.  Since bottom-line earnings is the primary factor that influences business value, a proper presentation of the financials is essential. Prospective buyers must be able to appreciate the full benefit of owning the business and be able to understand its actual income-generating ability. By recasting, or adjusting, the financial statements, the actual financial performance of the business can be demonstrated.

 

 

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