Value of a Business

Cityscape view of downtown Boise Idaho

thumbnail of a man…and the real world of how it will be sold.

Selling your business is a complicated process that usually starts with a professional assessment and valuation. The value is usually presented in a range rather than an “absolute” value or single price. That appraisal is best described in two parts. One the most likely fair market (resellable) value of all the equipment coupled with any cash (deposits, accounts receivable) being sold. Two, the intangible value of past earnings, profits and cash flows that accrued to you, the seller. That value historically is about a maximum of half a year to three years or a multiple of .5 to three times 3 cash flow. These two are added together to form a potential value, but the real world will differ.
Once you, the seller, have the range in mind from liquidation price on assets in a business that makes no money to one that has a high value of assets, land, equipment, tools at fair market and includes multiple of cash flow, you then have an idea of what buyers will see as well. At this point you have to decide that you either want to sell and are motivated or you only want to sell ‘If” the price is at its maximum because here is what the real world will require.
Buyers are limited to what cash they have for a down payment and what cash flow they need to live. Typically buyers will need 20% of the selling price as a cash down payment. They usually all need bank financing so seeing someone write a check from their bank account or liquidating assets like real estate is not real world at all. They just won’t do it. They will seek a bank loan.
Banks are adverse to risk so they don’t lend to the blue sky portion of a sale. They want the sellers to share that risk and offer a loan to the buyer. The seller carry-back loans are typically about 20% of the selling price, or greater if they, the banks, see more risk. More risk can be the buyer’s credit, cash, history and abilities or it can be risk from the seller like limited assets, down-turns in revenues, or market sensitive issues.
Banks also won’t use the assets of the business at full market value (exception is real estate) to collateralize the loan. They will usually offer 80% of the book values as an amount to lien on. So if your business is short on assets to secure the bank loan, that security has to come from the buyers assets.
As a seller, the real world here is that “if” you really want to sell, you must be prepared to offer some lending to the buyer. Not all that bad as those loans are secured with liens on your business assets being sold and personal assets that the buyer has. You may be in a second or third position behind previous lenders, but you do have some security. Other “real world” considerations can be lower price but more cash at closing or combinations of less selling price, more cash, seller notes but you will need to understand all of these implications if you really want to sell.
The real world of selling your business isn’t meant to be negative but you have to understand that the potential for you to sell needs to be a shared issue between seller, banker and buyer. It just can’t and won’t be “all or nothing”. Decide now if you really want to sell or will “only” sell if….if being your way only.
Information provided by Kip Moggridge at Arthur Berry and Company or 208-639-6169. Additional information available on the process of valuation and selling.

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