Business Valuations – Business Broker – Selling & Buying a Business
Frequently Asked Questions
Business Valuations FAQ’s
What is the difference between a Business Valuation, Appraisal, or Evaluation?
The appraisal buyer must beware in this case. If the professional you contact cannot or will not provide an appraisal, a red flag should wave immediately. While it is common for many business appraisers to intermingle these terms, persons not qualified to provide expert appraisals, litigation support, expert testimony, reports that may face the scrutiny of Federal or State agencies, judges, and the like may try to sell you something short of what you really need.
An evaluation is a commonly used term that usually falls short of the requirements of the Uniform Standards of Professional Appraisal Practices (USPAP). Make sure the professional you choose has the proper training in USPAP procedures. Has the person provided reports that meet the above requirements? Have they qualified and testified in business valuation issues in a court of law? Have they taught or lectured on the issues of business appraisal? All these and many more credentials such as years of experience, professional memberships, education, experience in the real world of business sales, etc. will help guarantee that the appraisal you receive will provide you with the report you need. When choosing a person to place a value on your business, ask for their resume or Curriculum Vitae (CV) to aid you in accessing their credentials.
When should I get a business valuation?
Valuations should be done anytime it’s important to know the value of your company. Usually this is done when having a solid number for the worth of your business can help you get the most out of it. Some examples include:
When selling your business
When buying a business
Mergers or acquisition
During a divorce
As a shareholder of the company
Entering into a buy/sell agreement
Real estate or tax issues
Valuations are typically valid for 12 months, as financial conditions change frequently. Learn more on our Business Valuation page.
What kind of business valuations are there?
There are many different kinds of valuations to get the most out of your company’s value. Here are some of the common methods we use to determine the value of a business.
Capitalization of income valuation
Owner benefit valuation
Multiplier or market valuation
Contact us to find out which will help you maximize your business’s value.
What is included in the business valuation?
What is included in a valuation depends on the type of valuation you’re going to get.
For example: Asset valuation is the value of capital assets and fixed assets a company possesses in its financial portfolio. These values exist on the owner’s balance sheet but are not usually stated in the real world but more for reasons of taxation. Certain tools like, quantitative methods and statistics, financial statement analysis, ratio analysis and economic analysis, etc. are necessary to put a fair market value on them.
How much do valuations cost?
The cost of a valuation depends on the type of business and the extent of the valuations. Costs range from our Basic Business Valuation, which is free, to $1000 to $10,000 depending on the size of the company and the type of the valuation, such as our Strategic Options Analysis.
What is the fair market value of my business?
Fair market value is an estimate of what a willing buyer would pay to a willing seller in a free market (both having equal knowledge of the business and transaction variables), for an asset or piece of property under conditions where neither party feels pressured or obligated to buy or sell. If a transaction occurs within the aforementioned conditions, the transaction price is usually the fair market value. This is not the same as intrinsic value which an individual may place on an asset, meaning what he or she feels the selling/purchasing price should be based on personal preference.
Should I get a business valuation before I sell my business?
Selling a business is far different from selling a house or other tangible asset where there exists comparable sales information sufficient to support a value. Unlike real estate, it is not unusual for 50% or more of an operating business’s value to be based on intangible assets such as goodwill, intellectual property, licenses, location, etc. Valuations give you that ability.
How can I prepare for a business valuation?
When you come to George and Company for a business valuation, we start by asking you to provide us with a number of items that will aid us in developing a value for your company. The most important information we will request are financial records and documentation.
In most instances we will ask you for a minimum of three years of tax returns and/or financial statements. Due to the fact that financial statements are typically a more accurate picture of your company’s financial position, emphasis may be placed on these documents.
Other important information includes the history and description of the company, the competition, and the local economic conditions surrounding your business’ location, or the global economic conditions if your business trades on a global scale.
Business Buyers: Frequently Asked Questions (FAQ)
How do I get started with the process of finding a business?
At George & Company, we offer a free consultation that allows you to share with us your interests such as geographical preference, type of business, industry groups, cash flow, required down payment, financing options, etc. You will be asked to sign a confidentiality agreement that will allow you to search the databases of our and other cooperating brokers for up to one year.
Can I talk with the owner(s) of the business prior to making an offer?
We encourage a lively dialog between the business owner and the buyer. Due to issues of confidentiality however, we require that any discussions with owners, management, suppliers, etc. be done with our coordination. This process is critical to understanding the business in depth, but must be handled with delicacy.
How much money will I need to buy a business?
Typically, each business requires a different level of investment. As a general rule, a down payment of 15% or more of the total selling price is required. If the seller is willing to hold a note, this 15% requirement will usually be higher.
Do I have to pledge my home as collateral in the acquisition of a business?
This answer to this question can vary depending on many elements. If you apply for a loan with an SBA (Small Business Administration) guaranty, you will not typically have to pledge your home if your home equity is less than 25% of market value. The business assets are usually sufficient to collateralize the loan.
Will I be allowed to review the financial records of the business?
Yes! We believe that a buyer can only make an informed judgment as to his/her potential interest in a business if they are in possession of all the relevant facts. At George & Company, you can get any information you need after executing a confidentiality agreement. Of course, this information can only be shared with certain professionals like your attorney and accountant.
Do I have to pay a fee to George & Company?
Generally our fees are paid by the selling business. Our business search services to you are totally free. We do offer our services to buyers as buyer agents if you prefer to have us represent your interests. Buyer agency is by contractual arrangement with you. We can do as much or as little as you desire and under these arrangements we are usually paid an hourly fee or a fee based on the selling price of the business upon your successful acquisition.
How is a business acquisition financed?
George & Company’s transition experts are highly experienced in the valuation, sale and financing of small businesses. We know which lenders, both local and national, are most aggressive at any given time. Many times, the seller will offer to finance the deal. This generally suggests that the seller is comfortable with you and their business to carry this risk themselves. Conventional outside financing through banks and major small business lenders is typically available in over 70% of the businesses we represent. One of the benefits of conventional financing is that the term of the loan can be up to 10 years. Many buyers also like the fact that a lender won’t do the loan unless the business passes underwriting standards. This is like having a second set of eyes weighing the business opportunity prior to your purchase
What is business underwriting?
Business underwriting refers to several different procedures depending on where and what business is being conducted. If a person goes to a bank or a private lender, underwriting refers to the detailed credit analysis and risk assessment performed before granting a loan, insurance, mortgage, equity capital, etc. The credit analysis would be conducted based on the borrower’s credit information including variables like salary, employment history, financial statements, credit history, lender evaluations, etc.
FAQ’s for Sellers
I have been thinking about selling my business, but I am not sure if I am ready or how to get started?
Selling a business can be a daunting process. The keys to a successful sale are preparation, organization, and implementation. Below are a few key concerns if you are contemplating the sale of your business. We believe it is best to consult with competent professionals with expertise assessing the following issues.
Do you have a clear reason why you want to sell your business?
Have you planned what you’ll do once you have sold your business?
Have you had the business valued by an experienced business broker or appraiser?
Do you know what taxes would be due if you sold your business?
Would the sale be sufficient to finance your lifestyle and plans after the sale?
At George and Company, we understand the importance of these complex issues, and we recommend working with experienced professionals if you are considering the sale of what has been your livelihood. We firmly believe that certain reasonable expenditures in preparation of such a sale will result in a maximum of net dollars realized to the benefit of the Seller once the sale is completed.
How do I know what my business is worth?
A business is a combination of physical assets, like furniture, fixtures and equipment, and intangible assets, like customer lists or more importantly customer relationships. Another name for intangible assets is goodwill. What are those factors about a business that drives the economic success of that business? There are many factors that determine the value of a business, including the economic condition of the market it serves. Business Valuations provide a comprehensive look at your company with a systematic review of the myriad of factors, both internal and external to the business, that drive business value. The value of a small breakfast and lunch restaurant can be reasonably estimated by an experienced broker in an hour or two. The value of a larger business, with a complex financial structure, serving a diverse market, takes many hours of careful analysis by a trained professional. The goal is a determination of maximum value that will hold up in the marketplace of buyers. Buyers seek to minimize risk and yet expect a maximum return on their investment. We highly recommend Sellers invest in a professional assessment of the fair market value of their business. Such an assessment is indispensable for a successful sale on terms that best benefit the Seller.
Should I sell my business myself, or do I need a professional?
Candidly, many of our listings and engagements follow from a period of time where our clients tried selling on their own. Many business owners have had buyers approach them directly with offers to buy. Some of these deals are successful. But all too often they are not, and lead to frustration and stress. Many of our clients have dealt with such buyers for months and even years without a successful conclusion. Haggling over price is often an issue that never gets resolved. At George & Company we have the expertise and experience to defend the asking price while shouldering the busy work that comes with managing the process. As such, our clients can concentrate on running their business, while we handle the day-to-day process of getting the job of selling the business done.
Do I need my Attorney and Accountant to help sell my business?
You will need an accountant to review the taxes associated with selling your business. Taxes owed to both the State and the Federal Governments will vary depending on a number of factors. There will be closing costs incurred and capital gains taxes due with the sale. How the sale of the business is structured will affect the amount of taxes that will be due with the sale. An accountant familiar with structuring the sale of a business to minimize such taxes is important. A ‘transaction’ attorney with expertise in business transaction law, as well as with direct experience representing clients with the sale of businesses, is highly recommended. The success of any business transfer is dependent on the Team effort put forth. We can provide a list of attorneys with experience in M&A transactions and other types of business transfers of ownership. We are familiar with tax minimizing strategies that a CPA in general practice may not be aware of. At George & Company, we work with both our client’s attorney and CPA to facilitate a deal structure in the best interest of our client Seller.
How long does it take to sell a business?
According to the Business Brokerage Press, published annually, the average time for the sale of a small business is 212 days. That doesn’t mean all businesses sell in 212 days! At George & Company, some deals come together within 90 days, others can take a year or more. Some industry sectors are in high demand, while others have a smaller pool of potential buyers. The strength of the financial structure of the business, as well as the industry sector of the business, both affect the demand or salability of a business. Due to these considerations our contracts run from a minimum of 6 months to 12 months.
Can I sell my business without my customers and employees knowing?
The answer to this question is yes. That said, it is a valid concern. It’s been said that the job of a business broker is to sell their client’s business in the shortest possible time, for the highest possible price, and without anyone knowing it’s for sale…including the buyer (not). Of course, prospective buyers must be engaged in a dialog, but one that maintains strict non-disclosure and confidentiality. Business brokerage is in some sense a stealth profession. We market our clients very carefully using procedures that minimize unauthorized knowledge the business is for sale. A legally enforceable business confidentiality agreement, also called a non-disclosure agreement, is first executed. All marketing activities are implemented with the discretion necessary to keep the secret. For example, a general generic flyer, sometimes called a teaser, can be sent to a carefully selected list of potential buyers. Buyers who have been pre-qualified for appropriate industry experience, business acumen, and financial ability. At our company, we like to say Confidentiality is the Operative Word.
I carry a lot of inventory; how does that affect the value of my business?
Many businesses carry large amounts of inventory. Inventory is an important asset, especially in the retail sector, that drives sales. With the sale of a business, the value of such inventory is counted at wholesale cost and quantified in the allocation of the total purchase price. Whether the deal structure is that of an asset sale or stock sale, the Seller receives the value of the inventory in the sale. There is some confusion with regard to including the value of inventory in the asking price of the business for sale. For example, should the asking price of a retail liquor store be priced including inventory, or marketed as a base price for the business plus inventory. It is routine with the sale of larger middle market companies, to include the value of inventory in the asking price. Many retail businesses, for example liquor stores, are marketed with a price for the business plus inventory. There is really in the end no difference, as the Seller receives compensation for the cost value of that inventory in the final selling price of the business.
I carry a sizable number of receivables; How do I get paid for them?
The simple answer is the buyer purchases the receivables at closing, and then collects the debts as they are paid to the business. If there are receivables that may be questionable in terms of collecting their value, the Buyer may not want to pay for them. Typically, receivables due within a normal billing cycle, are paid for as a segment of the total purchase price.
How are business purchases financed?
Business purchases are either financed through third party lending, or with Seller financing. The size and type of business is an important factor. Micro-sized businesses with a value under $200-300,000 often require Seller financing. Most Banks will not consider them. Many Sellers do not want to finance the sale of their business, unless there is no possibility of third-party financing. For the Seller to finance, the Buyer will be required in most cases to inject a 50% down payment. The Buyer must have a very strong credit rating, as well as direct business experience.
For larger businesses, the purchase can be financed through a third-party lender, typically a bank. Most banks doing loans for business acquisitions do so utilizing the federal government’s SBA (Small Business Administration) guaranteed lending program. The SBA limits the risk for the bank by guaranteeing a significant portion of the loan. Historically this has been 75% of the amount of the loan. Historically the buyer would inject 20% of the purchase price to satisfy the down payment requirement, and pay certain other closing costs associated with the SBA loan. An obvious benefit to a buyer is the ability to leverage the purchase. Whereas a Seller would want a 50% down payment, the down payment utilizing SBA is much lower (20%). With Seller financing the term of the loan may be at a maximum of 5 years, and with SBA financing the term can be up to 10 years.
Currently the SBA has increased the incentives for these business purchase loans. They have lowered the down payment requirement to 10%. They have waived the Buyers SBA Guarantee Fee, which can be $5,000 to $15,000 depending on the size of the loan. The SBA will also, for businesses under agreement in 2021 through September 30, 2021, make the first six months of amortized monthly payments to the lender. These are very positive incentives in response to the current COVID 19 economic downturn.