Frequently Asked Questions: Buying a Business
- How do you value a business?
- What portion of the sale will the Seller finance?
- When can I have copies of the financials and tax returns?
- I do not have any representation – can you recommend legal and financial counsel?
- Why buy a business versus starting my own?
- What is goodwill?
- Are there any tax benefits associated with buying a business?
- What is the difference between Profit (Net Income), Cash Flow and Discretionary Earnings?
- Should I consider an SBA-backed loan to finance my business acquisition?
We take many elements into account when determining the price of a business. We review historical financials, cash flow, asset and equipment values, condition of the premises and lease terms, location of the business, competitors and the economy before deciding on the sell price. We also consider recent transactions of similar companies – both ones we have represented and transactions outside of our brokerage through paid data sources.
This varies with each seller. Some are willing to finance a portion but most sellers are reluctant to finance much of the sale price. The terms or length of the financing period also vary.
This said, most transactions below $5.0mm will generally apply for an SBA-backed loan to assist in the purchase of a business. This is a loan that is government backed and offered at competitive rates. Think of it like a mortgage when buying a house – most people make a down payment and then mortgage the majority of the total cost.
Due to the confidentiality of selling a business and the sensitivity of having tax returns and financials sent out to all “prospective” buyers, we provide a summary of the financials and a profile on the business to all qualified buyers at the onset of the process or at the time a buyer wishes to meet with a Seller. After that initial visit we make this information to the buyer for viewing at our premises prior to making an offer. Once an offer is accepted, the process enters the due diligence phase where the buyer is given complete, detailed copies of all necessary requested financial statements.
Absolutely! As a mergers & acquisitions firm, we are well connected with the representation you will need as a buyer. We have a wide referral system throughout the Southeast and can assist you in finding the right attorney, CPA and any other representation you may need.
Many small businesses fail within the first year or two after starting up. By purchasing a business that is already up and running, you are eliminating many of the risks associated with a failing business. An established business has a proven track record, a proven/vetted business model, a customer base, trained and experienced employees, and most importantly, positive cash flow for the new owner. The risk is lower, and often times the growth is accelerated with these fundamentals already in place and with a new owner coming in with fresh ideas and new energy. Plus you’ll start off in month 1 with a positive cash flow and able to draw an income, whereas most new businesses take a while to build up enough business to generate a substantial income for the owner.
Goodwill is the difference between the total value of a business and the value of other “hard” assets, inventory and equipment. All prospering businesses have goodwill and the price of goodwill is calculated on how engaging the business is and the financial aspects of the business, such as cash flow. When you hear discussion of “multipliers” involved in business valuations, usually the multiplier is for the goodwill and is based on cash flow, net income, or in some more rare cases on revenue.
Another way to look at it is that goodwill is essentially everything that’s left once you strip away the physical “stuff” such as equipment, inventory, real estate, etc. The most common examples of goodwill elements are the value associated with repeat/recurring revenue, the company’s brand, the value of the existing employees, marketing lists, website or internet assets, proprietary software and most any “intangible” assets.
The buyer has an opportunity to make business growth decisions with tax deductible investments in their future while they build the value of their business. Upon purchasing a business, business goodwill/personal goodwill, fixed assets, building purchases all will provide depreciation benefits while the buyer builds their new company.
We always recommend that buyers seek the professional guidance of a CPA (NOT a certified tax expert (there is no credential like this))
This can be tricky because we’ve learned over the years that everyone’s definition of each of these terms can vary just a bit. Generally speaking, the profit of a business is the amount of money that is left over after all expenses are accounted for. The Cash Flow is the total amount of money being transferred into and out of a business. Cash flow considers not just a businesses profit, but also typically factors in other owners benefits, interest payments or interest received, depreciation, amortization, etc. It shows how much cash the business is producing which could be different than it’s profit from normal operations. Discretionary Earnings are owner benefits, EBITDA and all expenses that are not applicable to the new owner. For instance, the owner may currently have a more expensive office than you plan to have, or may be leasing a vehicle that you do not plan to use, or other expenses that are not applicable to you should you buy the business. Again, this definition can vary from one person to another.
At Viking, we make it a standard practice to re-cast the financial statements when a buyer is first reviewing a listing in order to give buyers an “apples to apples” comparison and to minimize the potential for misunderstandings in the post-offer due diligence phase.
Absolutely! The economy has begun to recover from the economic downturn of 2008/2009 and SBA loans are being granted more often than they ever were before and with more benefits to the buyer. Backed by the Small Business Administration, SBA loans are offered on 10 year terms, which is very attractive when compared to a real estate loan, which is usually around 25 years. SBA loans also provide reasonable down payments of around 20% and come with fixed interest rates of 6.5% for the entire ten year term. SBA loans can help just about any buyer finance a new business venture while maintaining financial flexibility.