As an Advisor on BizBen.com I talk to many California business buyers, business owners, business brokers, and agents on a daily basis about valuing California small businesses. It always amazes me on how some of these individuals come up with the values on small businesses being sold. No wonder only 30% of all California small businesses actually end up selling!
In many instances no consideration is given to the total picture - like will the available cash flow of the business be able to pay the debt of a loan or some form of business purchase financing, will the deal as structured or priced even be attractive to financing sources, "cash" price vs. "note" price and how these factors figure into the equation!
I have seen many "professional valuations" where the asking price just doesn't make sense and owner/sellers wonder why their California business being sold just sits there with no action taken by potential business buyers!
There is a solution that is grounded in the fundamentals of economics, and time tested in the marketplace, where the influences of supply and demand ultimately determine where a business belongs on the price scale. One economist explains this market approach by comparing a business to a machine which has the purpose of making money: The more money it makes, the more it's worth. And that explains why, for example, there is a strong demand for a very profitable distribution business with few hard assets; and why it is worth more in the marketplace of available businesses, than a large machine shop that would cost nearly $1 million to duplicate, but can't make a living for its owner.
Adjusted Net Income
The first category of information needed is called adjusted net income (cash flow, SDC: sellers discretionary cash), and is the total amount of cash produced by the money machine. It's a figure that includes the profits, the owner's salary and all of the many cash-related benefits which are enjoyed by the principals of small businesses. Those benefits can include the use of a company car, the company-paid premiums for health, life and auto insurance, plus personal expenditures tucked into travel and entertainment, subscriptions and similar business expense categories. Interest expense should be added to adjusted net income, along with accounting entries "such as depreciation and amortization" that can divert money to the owner's pocket so that it never appears on the bottom line of the P&L.
While some of these items vary from business to business, any owner knows which categories of expenses in his or her financial records include sums of money that should be added to adjusted net income. Many business owners also know of cash income that never sees the business records in any way, shape or form. Some owners feel they should get credit for these sums in the calculation of value. But it's a poor policy to collect unreported income and then attempt to have it included in adjusted net income for evaluation purposes.
When selling, your buyer prospects want any statements you make about your business to be supported by evidence in the form of accounting records and other reliable sources. To admit that you are doing business "off the books" not only exposes you to problems with the IRS, it also sets a bad tone with prospects who if they are going to be interested in your business - need to believe your practices and record keeping are above reproach.
Adjusted net income is usually the first thing any buyer wants to know about when investigating a business; and not just the past few months' worth of income. A seller should be prepared to demonstrate a history of earnings, and have the documentation to back it up.
The next piece of the equation comes from the expectations working in the marketplace to shape the multiplier a figure which will be computed, along with the cash flow, to calculate a rough value. The validity of the multiple is that it reflects behavior in the market. There is no need to theorize about a proper multiplier. It's calculated by determining what buyers actually pay for small businesses in California. BizBen.com has a database of comps of pre and post California small business sales and we continually add more weekly. Most multipliers we find at this point in time are between 1X to 4X (provable) annual adjusted net income. The difference in the multiple depends on many factors - supply and demand for that type of business being sold/purchased, competition, history of earnings, and current operations of the business (possible future operations play a slight role).
|Helpful Resources To Assist In Selling And Buying California Businesses|
|Diane Boudreau-Tschetter: Escrow & Bulk Sale Services - CA
California Business Escrow, Inc. is a full service independent escrow company serving all of California and has expertise in a wide range of escrows. Our team prides itself on providing an exceptional escrow experience. For more info phone Diane Boudreau-Tschetter at 888-383-3331 or 209-838-1100.
|Elizabeth McGovern: Escrow Services - San Francisco Bay Area
McGovern Escrow Services, Inc., is a leading independent escrow company. We are a trusted partner with our clients, assisting them through the tangled bulk sale & liquor license transfer process. We provide attentive, quality & innovative customer service. Phone Elizabeth McGovern at 415-735-3645.
|Helen Yoo, New Century Escrow - Escrow Services In Southern California
New Century Escrow, Inc. is a fully licensed & bonded independent escrow company. Over 20 years combined experience in handling bulk escrow transactions. Multi-lingual staff that speaks your language, including Korean, Chinese, Vietnamese. Call Helen Yoo direct at 626-890-1151.
|Janet Carrera: Escrow & Bulk Sale Service - SF Bay Area
Redwood Escrow Services, Inc. is a full service, licensed independent escrow company. We are EAFC Fidelity bonded, fully insured & licensed with the Department of Corporations. Committed to offering our clients the most comprehensive variety of escrow services available. Phone Janet at 510-247-0741.
|Shalonda Chappel: Escrow & Bulk Sale Services - Southern California
Escrow services to brokers/agents, sellers, & buyers. Established 43 years. Extraordinary service. Experienced with handling difficult transactions. One stop for all your escrow needs: Bulk sales, lien searches, UCC searches, liquor license transfers, publishing & recording services. 951-808-3972.
|William F. Ziprick, Attorney: Legal Services For Buyers And Sellers
Through creative problem solving, attention to detail, accessibility, & understanding that unnecessary delay is often a deal killer, I work closely with my clients and other professionals to consistently achieve a high rate of closings. Office: 909-255-8353, Cell: 509-951-7230.
|Brad Steinberg, Business Broker: Laundromat Specialist
PWS is the leading laundromat broker in California. Since 1968 PWS has brokered over 2,500 laundromat sales. With over 90 employees dedicated to the coin laundry industry, PWS has 18 licensed agents, a 3 person in-house finance department, 10 service technicians and a 20 person parts department.
|Related Articles, Events, Blog Posts, Discussions, Videos, Interviews|
|How Many Months Should I List My Business With A Business Broker?
It's important to remember that selling a business takes time. Unlike selling a house, which can be sold relatively fast, a business can take up to six months to a year to sell. Joe Ranieri (Orange County Business Broker) at 714-292-5448 explores this topic from a Business Brokers perspective.
|Buyer Beware: Does A Company's Culture Effect The Sale Of A Small Business?
When purchasing a small to mid-sized CA business, there are a many items to evaluate. One area that is often overlooked is the business's office culture. Peter Siegel, MBA with BizBen discusses with business buyers the importance of understanding how the business "feels" on a day-to-day basis.
|How Many Listings Is Too Many For One Broker To Handle? Is It 5? 10? 20?
Peter Siegel, MBA in this Vlog/Podcast discusses how many listings is too many for one business broker to handle at one time. Is it 5 is it 20? I recently had a coaching call with one of my BizBen broker clients who asked that question this week. There are many factors that go into the answer.
|Tips When Using Escrow Bulk Sale Services When Buying Or Selling A Business
The final part of the business for sale transaction is the escrow and bulk sale process by Peter Siegel, MBA (Business Purchase Financing Expert, ProBuy & ProSell Program Advisor) answers questions and describes the escrow and bulk sale process. Peter can be reached direct at 925-785-3118.
|Absentee Run Small Businesses - Is That Really A Possibility For Buyers?
Is buying a absentee run small business really a possibility? Peter Siegel (BizBen ProBuy Director) gets asked this question a lot in his consulting sessions with business buyers. Read more about what other Advisors and Intermediaries feel about this topic on this popular BizBen Discussion!
|How To Determine Whether The Buyer For Your Business For Sale Is Sincere
A problem owners encounter when offering a CA business for sale is that not all so-called business buyers are qualified to make the purchase. It's frustrating and costly to waste time showing non-qualified buyers the business. Here are ways to identify time wasters so the focus is on real buyers.
|Confidentiality: Why Keeping A Deal Quiet Is Important To Sellers And Buyers
Owners should keep the fact that they want to sell their small business confidential. Before releasing information to prospective buyers, buyers should commit to confidentiality in writing & should understand why it is important. Peter Siegel, MBA a ProBuy and ProSell Advisor with BizBen explains.
|What Should I Do If Other Buyers Are Trying To Buy The Same Business As Me?
Buying a small business is hard enough when there is no competition, so how might a buyer navigate the process when there is additional competition from other buyers? Potential small business buyers are offered a few key ways that a buyer can beat out other potential business buyers in this article.