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Pricing and Selling a Business

Selling a business, even if real estate is involved, requires different skills when it comes to pricing and promoting it to prospective purchasers. Here’s where many real estate agents go astray – by not separating the business from its real estate location; instead treating each as a separate (distinct) sale requiring different focus and expertise. To be sure, an operating business is a totally different entity than the real estate where the business resides (most business locations are in fact leased).

  • The business entity may be (should be) different than the real estate owners, a separate LLC, for instance, likely involving different partners or percentages of ownership.

 

  • Different contracts are needed to transfer business assets, including accounts receivables, inventory, equipment, supplies, copyrights, and licenses (for example). Unlike real estate, business brokerage contracts can contain future guarantees of volume or client/employee retention. Sellers may be required to perform ongoing services for a time following the actual transfer of business ownership.

 

  • Evaluation methods are especially different, as a working business has both tangible and intangible considerations, such as “good will,” as well as contractual agreements or rights that may not automatically pass on to a new owner (a franchise license, for example).

 

  • Business valuation methods vary widely, depending on the industry, business type, even local custom. Often these are simply “rules of thumb.”

 

  • While commercial real estate professionals have the expertise to analyze rental income and expenses, and assist with investment decision-making, they often fall short in analyzing a business from a financial perspective. A business P&L is almost always different from its cash flow, particularly where the business owner includes (legitimate) personal expenses, or performs management or maintenance services himself for free. Adjustments (upwards and downwards) must first be made.

FACTORS TO BE CONSIDERED IN EVALUATING A BUSINESS:

  1. Tangible assets – such as furniture, equipment, and inventory. If in good shape, there may be a ready market for them.
  2. Intangible business assets – including your business name, patents, copyrights, or customer databases you own. Favorable contracts with customers, suppliers, or landlords (if long term and transferable) can be valuable intangible assets.
  3. Sale prices of comparable businesses. What have similar businesses sold for? Be sure comps are recent, and evaluated apart from the real estate.
  4. Industry formulas. Seasoned business brokers often arrive at value by multiplying either gross sales or net earnings by an accepted number (multiplier). While these may be good “rules of thumb,” they are by no means sacrosanct. The more acceptable multiplier will be on net earnings, as they vary widely from business to business.
  5. Market demand. How many similar businesses are also on the market? How’s the economy trending in the area?  
  6. Seller motivation. Is health, financial or other pressure forcing a quick sale of the business?
  7. Type of buyer. Will the likely buyer require immediate cash flow, or will the new business be combined (merged) into an existing one? In such instances, the proposed purchaser should look for efficiencies and savings as some expenses can be consolidated or centralized.
  8. Terms of payment – such as the amount of the down payment, repayment period, and interest rate can affect how much a buyer will agree to pay.