Q. How is a Business Broker different from a Real Estate Agent?
A. Real estate agents do a fantastic job at selling properties but don’t generally have the training, knowledge, expertise or skills required to negotiate and fully understand the financial and legal aspects of selling businesses. The whole procedure from start to finish is much more complex, even in the simplest of businesses. A Business Broker will understand the legalities of a contract and the ramifications to both parties if not followed through correctly with precision and accuracy. Also, the market is constantly changing and by choosing to use a qualified business broker, you can be rest assured that your business will be appraised accordingly for today’s market, an essential component to consider as an overpriced business will simply not sell and to under-price your business will cost you valuable dollars!
Q. How do I know if my business is saleable?
A. Your Business Broker should offer all the help and advice that is needed to get your business ready for sale. By providing them with the information requested and answering a few questions, you should be given a written appraisal in a relatively short timeframe outlining the basis on which the appraisal has been completed. Most businesses are in fact saleable it’s just a case of determining the correct sale price in the current market. An overpriced business will not sell and of course by selling your business below the market value you will be doing yourself an injustice.
Q. What is consider when appraising my business?
A. There are many factors considered when appraising your business
- Net profit (before & after adjustments)
- Gross Profit %
- Turnover Fluctuations in all the above
- Age of the business
- Location of the Business
- Lease agreement
- Staffing structure
- Role of the owner
- Intellectual property
- Written contracts/agreements
- Barriers to entry
- Potential for growth
These are a few but not all the factors considered. All businesses are different and each one is assessed individually.
Q. Can you give me a ‘ball park figure’ if I don’t supply written information to you?
A. No, this would be a disservice, the appraisal could be severely over or under valued without all information considered. One tiny difference in the information supplied could mean thousands of dollars in the value of your business.
Q. What is the ROI?
A. The ROI stands for RETURN ON INVESTMENT. This is the way that most, although not all businesses are valued here in WA. Essentially it means the percentage of the purchase price (if run at the same sort of profit) that the buyer would expect to get as a return each year exclusive of his personal drawings. For example if he were to buy a business at a 50% ROI that would mean he would be likely to get 50% of his initial purchase price back in the first year effectively taking two years to get it all back. The reasoning behind the ROI difference is the risk attached to each particular business. The heavier the risk – the higher the ROI therefore the purchase price is lower in relation to the net profit. Because it is % based, you will see as the figures get higher, the monetary difference is huge.
Remember…the stronger the business, the lower the ROI and the riskier the business, the higher the ROI!
For example if we take a retail business, 7 days per week, short lease, lots of staff, reliant on location:
Net profit $100,000
Sale Price $142,857
Wholesale business, 5 days per week, long lease, easy product lines, barriers to entry and low staff
Net Profit $100,000
Sale Price $333.333
The reasoning behind the ROI difference is the risk attached to each particular business. The heavier the risk – the higher the ROI therefore the purchase price is lower in relation to the net profit. Because it is % based, you will see as the figures get higher, the monetary difference is huge. There are many points considered when arriving at the ROI to be used in our calculations, they are pretty much the same as how a business is valued (see above)
Q. How does the breakdown work?
A. Once you have been presented with your written appraisal, you will see that the suggested selling price is inclusive of all the Plant, equipment and also stock. The value of the plant & equipment is decided on and the stock value is taken as an average over the year
For example Let’s say the sale price is $1,000,000 Stock $180,000 P&E $300,000 Total $480,000 Then the goodwill would be $520,000
Q. What are add backs or add ons?
A. When you look at your profit & loss statement in your accounts, at the bottom you will see your net profit. This is the end result and what you are left with after all the expenses of the business have been paid. As part of the expenses, many (but not all) business owners may choose to run several private expenses through their accounts and the final figure may not be a true representation of the business, therefore adjustments must be made to show exactly what profit the business is in fact making.
For example: The net profit as per accounts shows $150,000 Within the expenses there may be an expense of $20,000 for accountancy but the business owner may have several investments that his accountant takes care of on his behalf and the entire bill is paid through the business whereas realistically, the normal cost for the accounting in this particular business should cost approx. $4,000 therefore we would do an add back of $16,000. This would then effectively increase the net profit to $166,000.