Buying or selling a business can be tricky

Many people want to be a business owner, but few have a Bill Gates-like vision of the product or service that consumers will find irresistible. For those who can’t come up with the killer idea, purchasing a business may be the right answer to scratch that ownership itch. But how do you go about buying a business? How much should you pay? Is it the right fit for you?

I recently sat down with Todd Blair, owner of the local branch of Murphy Business Brokerage, to find out more about how to go about buying or selling a business. Murphy Business Brokerage is one of the nation’s largest business brokerage firms, working as an intermediary to bring together potential buyers and sellers. Todd has engineered over 30 transactions locally.

So what is the value of a business? The quick answer is that a business is worth what a qualified buyer is willing and able to pay for it. Unfortunately, too often timing works against the seller. “Most business owners come to us at exactly the wrong time,” says Blair. “Business is bad and they don’t want it anymore.” And often business owners have valuation expectations that are unrealistic. “The biggest misconception and obstacle to a sale is the owner’s idea of market value,” Blair explains. “Before I get started marketing a business, my job is to help the seller understand the market value of their business today and identify what actions the seller can take to get to the value they want in the future.”

There are several methods that a business broker uses to value a business. The broker can identify the market value of the company’s net assets, or what the assets would be worth if the company was liquidated and sold on the open market. A second approach is to place a multiple on the company’s earnings or owner benefit in cash. Multiples are dependent upon the particular industry, risks in the business, and the economic climate, and the multiple is subject to negotiation. Businesses are also valued by comparing similar entities where recent similar transactions have established a market price. These approaches all help in setting a price range, but deal structure, strategic fit for the buyer, and other issues will all impact the final selling price.

How can a seller enhance the value of his or her business? Prospective buyers make their purchase decision based on the potential earnings of a company, but the price will be established based on past or current performance. Ultimately, improved financial performance will lead to a higher business value. Blair points out that there are other criteria considered in valuing a business, particularly indicators which reflect sound cash flow such as accounts receivable and accounts payable levels.

Prospective buyers should be wary of red flags that warn of potential trouble. These can include declining revenue and/or profits, ongoing legal issues, high employee turnover, or a high customer concentration. (Having a small number of customers means losing just one could cause significant damage to the business.)

From Blair’s perspective, a broker provides an unbiased, third-party perspective that can make a sale a win-win for both the buyer and seller. “Most people have experience in buying cars, even houses, but few people have purchased a business,” says Blair. “Having someone that has gone through the process helps increase the odds of success.”

Do you have a business question or topic that would make a good column? Send your ideas or questions to jeff.neuville@b-assistnc.com and share your business experience with others.