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From the monthly archives: May 2011

We are pleased to present below all posts archived in 'May 2011'. If you still can't find what you are looking for, try using the search box.

How Long Does it Take to Sell a Business?

How long does it take to sell a business? The average time on the market for around 82% of businesses is four to 12 months. Fewer than 10% of businesses sell more quickly, and a little over 8% are on the market for more than 12 months. Why does it take so long to sell a business? Price and terms are the biggest reasons. Not overpricing the business, partial owner financing, and an owner training period are factors that are attractive to prospective buyers and can lead to a more timely sale. Preparation for the information a buyer may want to review, and having answers to the questions they will ask is key to a making the process more efficient and timely. Using advisors who are transaction-experienced can also shorten the time it takes to close the sale. These are some documents that a seller would want to gather and have available. Copies of  financials statements for the past three years. A list of furniture, fixtures and equipment included in the sale. Note: try to remove exc ...

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How are Payables and Receivables Handled When Selling or Buying a Business?

While all transactions are as unique as the parties involved, in most small business sale transactions the seller keeps the cash and outstanding receivables. They pay off the bills and any other outstanding payables and deliver the business free and clear of debt to the buyer.

In somewhat larger business sale transactions, there are many reasons why buyers consider acquiring the receivables.

 

  • Purchasing the accounts receivable offers the buyer the advantages of having control over the collection of the receivables and continued cash flow from the business, thereby removing the need to acquire additional working capital.
  • By acquiring the receivables the buyer immediately begins dealing directly with the most important element of the business - its customers.
  • The sale of the accounts receivable also offers the seller a clean break from the business and the ability to cash out. This approach leaves no open-ended accounting issues after closing.
  • Valuing the receivables depends on the future risk and resources necessary to collect the outstanding receivables. Therefore, the aging report of the accounts receivable would ordinarily be reviewed for history of late paying or uncollectible accounts so both buyer and seller could come to agreement on what should be paid for the outstanding receivables by the buyer.

Payables incurred prior to the transaction date is sometimes negotiated to suit the circumstances of the particular transaction, whereby the responsibility for the payables is sometimes considered by a buyer.

 

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How Much Cash is Required to Buy a Business?

This is one of the most frequent questions we get from those who want to buy a business. Not all ask that question, however, but should.

Since most people only buy a business once in their lifetime, they do not know how much it would take to acquire a business that would fulfill their dreams.

So, how much liquid funds do you need to put a down-payment on a business and how much do you need to close on the deal?  A short answer to this question is this. Businesses vary a great deal in price and is down-payment driven.  The higher the amount of down payment you have, the more likely you will be able to find a business that meets your needs.


These are the two cash requirements to think about when you start shopping for a business.

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Would a One-Time Advertising Event be Considered an Addback When Valuing My Business?

Recapturing Profits This question was asked by a business owner who is considering the sale of her business. An addback is an expense that is not a normal one for the business and is, therefore, taken out of the equation when performing a valuation and calculating a company's earning power. The goal when presenting financial information to a potential buyer is to clearly represent the business earnings. This is done by Recasting the financial information into a spreadsheet that we call a "Normalized Income Statement," a reconstructed representation of the company's performance and the owner's "Discretionary Earnings" across several years.   The IBBA (International Business Brokers Association) defines Discretionary Earnings as follows: "The earnings of a business enterprise prior to the following items: Income taxes, Non-operating income and expenses, Non-recurring income and expenses, ...

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Understanding Seller Financing in a Business Sale

Business owners who extend financing to a buyer for the purchase of their business often ask, "What happens if the purchaser defaults on the loan?" Should that happen, the seller would be able to exercise whatever rights are defined in the security agreement that is associated with the promissory note. The seller would usually have the right to get the business back, which may not always be the best scenario if the business has declined under the buyer's management and is not performing well. In addition, if the buyer is using the business' assets to get a bank loan, the seller will have to take a second position behind the bank. A seller should try to negotiate a personal guarantee by the buyer as part of the terms of the promissory note. The seller can also require the new owner to provide periodic financial reports on the performance of the business as part of the terms of the promissory note.

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What Information is Needed to do a Business Valuation Assessment?

Two of the most common questions business owners ask is, "How much is my business worth," and "What information is required to do a market valuation of my business." The answer to the first question is ultimately answered by the market itself. What we do is approximate the range of the most probable selling price a business might achieve in the current market. In order to determine the most probable selling price range, we ask for the following information. This is the bare minimum of documentation needed: three years of tax returns three years of income statements (profit/loss statements) interim (current year-to-date) income statement current balance sheet a list of Furniture, Fixtures, and Equipment (FF&E) included in business operations an estimate of fair market value of FF&E Tax Returns (Corporate or Schedule C) We use tax returns in combination with income statements to help determine owner's discretionary cash ...

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