Looking to sell your business…How can you find out what it is worth? Check this out!

Valuation is the number one question of all of our sellers when contemplating a sale, and of course, the concern of most buyers when purchasing a business.

Unfortunately there is not an easy answer, and more confusing there are probably several answers. Why?

  • Because business valuation is an art not a science
    Valuations are subject to the appraisers judgment, skill and quality of methodology. There are several standards of value for businesses (ie different values!).
  • Fair market value – The price at which the property would change hands between a willing buyer and a willing seller when the former is not under any compulsion to buy and the latter is not under any compulsion to sell, both parties having reasonable knowledge of the relevant facts.
  • Intrinsic value – Stock values that investors would consider.
  • Fair value – Legal standards to value. Often used in divorce.
  • Investment value or strategic value – The value to specific buyers. Could exceed fair market value.

But for our purposes let’s talk about fair market value. Essentially what a buyer would pay for your business in an open market.

Now, remember, this is a simplification of some very intricate valuation practices. There are valuation experts that specialize in providing very complicated reports. Those reports are often used for IRS inquiries, legal proceedings, intricate financing and other reasons. A full valuation of a business could cost ten to thirty thousand dollars. For small business sales, a valuation is usually not needed, and for the most part our simplified valuation methods are sufficient enough to determine your listing and approximate your eventual sale price.

There are three generally accepted approaches to valuing a business.

  • 1. The asset approach
  • 2. The market approach
  • 3. The income approach.

Asset Approach – values the assets of your business minus the liabilities. Some of the methods in this approach are book value, excess earnings method, asset accumulation method to name a few. However these values usually mean very little to the market value of most operating businesses. For the most part the asset approach does not properly represent the value of an ongoing business that has positive earnings.

Market Approach – Simply defined, it is much like a real estate comparable method. Like businesses in size and industry sell for similar valuations. There is the guideline publicly traded company method or the merger and acquired company method (private sale databases). There are many databases we can research to find multiples of gross sales and earnings to compare to your business. This method can be very reliable in most cases and is a strong indicator of value.

Income Approach – Your business is worth the present value of the income stream it will bring to an investor. There are several complicated methods including the discounted future earnings method as well as several capitalization methods. This approach is also a strong indicator of what a business with positive income is worth. These methods rely on future projections and growth rates to decide what the business may be worth. If that is true then why do most people multiply or capitalize historical earnings to arrive at a value? Because the assumption is the buyer will maintain the current income levels and they are a reasonable indication of future earnings.

Whew? What does all that mean? Simple. Your business is worth a multiple of your past earnings if a buyer can project those earnings will be maintained after the purchase.

What is the multiple? Well first we must discuss what you want to multiply? Net income? EBITDA? Owner’s benefit? In small business sales (businesses earning less than 1 million dollars), we use owner’s benefit. Owner’s benefit equals the net income, plus depreciation, interest, and the owner’s salary and fringe benefits. In other words, all the income available to ONE owner if the company was debt free. EBITDA is used by larger businesses and includes normalized salary and benefit package for an executive to operate your business.

OK now the multiples. Well the multiples of owner benefit can run from less than one to about three. If you business is larger and your EBITDA is near or above one million, the multiples can run from four to six. Is this set in stone? NO! How do you know which multiple would be used for your business? Well, the multiple will rise along with the size, quality, and verifiability of your owners benefit. Bad books, dim future, negative growth and little profits equal a low multiple. Excellent books, bright future, excellent growth you will garner a high multiple.

Can all that mean nothing. Yes!
Buyers determine a businesses eventual sale price. Not valuation experts. That is why no one can tell you exactly what your business is worth. Not your banker, CPA, lawyer, broker, or mother-in-law. The only individual that will tell you what it is worth is the eventual buyer – and that will be a subjective evaluation. The same business will be valued differently by every buyer.

Lost yet? Here’s a summary. Your business is worth the following:

  • 1. A multiple of earnings compared to like businesses (gross sales or owners benefit times an industry multiple).
  • 2. A capitalization of the net profit (NOT OWNERS BENEFIT…you cannot capitalize owners benefit!) 20% to 50% or a simple multiple of owner benefit.
  • 3. And if your business makes little or no money- Asset value is the only value. (Goodwill + inventory + equipment +etc.) Either sold as a whole or liquidated over time.

For more information check out  www.businesses4saleorlando.com

Published in: on September 1, 2010 at 7:51 am  Leave a Comment  

Potential new tax on the sale of your home

Will the new federal health care law imposes 3.8 percent tax on profits from selling your home. The truth is that, starting in 2013, only a tiny percentage of home sellers will pay the tax. First of all, only those with incomes over $200,000 a year ($250,000 for married couples filing jointly) will potentially be subject to the tax. For those with such incomes, the tax will not apply to the first $250,000 of profits from the sale of a personal residence and/or to the first $500,000 in the case of a married couple selling their home.

Published in: on August 26, 2010 at 8:23 am  Leave a Comment  

Thinking of Selling…Not Staying Local? Here are some things to consider to make the closing easier.

Q. I am selling my home at the end of next month immediately before I relocate across the country. What should I do to protect myself in advance?

A. When you are selling your home and relocating, small delays can cause major stress. It would be helpful to have your own attorney ready to accept Power of Attorney for you should you need to depart before the transfer takes place.  A power of attorney can be drafted quickly and will allow another party to sign all closing documents for you should you be unable to attend the closing.  Another important issue is to be sure you receive a certified check at the closing so that your funds are negotiable when you reach your destination. Many attorneys in other States will not accept the checks of your local closing company and will require either a certified or bank check for your purchase.  Be sure to ask your local closing agent for a certified check prior to your closing.

Published in: on June 21, 2010 at 10:28 am  Comments (1)  

What is the difference between a single family home, condo and P.U.D.?

Q. What is the difference between a P.U.D., a Condominium and a Single Family Property?

A. Simply put, the difference is in the ownership of the land under the house itself.  With a single family house, you own the house and land in total.

A Condominium is defined as “common ownership.”  The entire property is actually owned by the Condominium Association – not individuals – and is regulated by the Condominium Documents.  It is extremely important that you read and understand the Condo Docs before you purchase the property, as they state all the rules of the Association and will dictate your lifestyle to a degree.

As a unit owner, you will own the inside of the unit only (this is sometimes called “stud-to-stud” ownership), and are a voting member of the Association.  With a Condo, the Association is usually responsible for exterior unit and land maintenance.

A Planned Urban Development (P.U.D.) is sort of a combination of the above two.  A homeowner does own the land under their unit, and –as a rule – is responsible for the maintenance of their land and exterior.

However, a P.U.D. will have common land and sometimes amenities that will need to be insured and maintained.  You will find covenants and a minimal fee associated with ownership in a P.U.D.

Published in: on May 11, 2010 at 8:22 am  Leave a Comment  

Buying an Older Home? Don’t forget the importance of a home inspection.

Published in: on May 3, 2010 at 3:27 pm  Leave a Comment  

What happens to your home when you pass away?

Q. My husband and I own our own home. I am concerned about what will happen when one of us dies? Does our title need to go through the Probate Court?

A. You can minimize the need to probate an estate by making sure that all of your assets including your home are in both names. Your original deed would need to indicate that you and your husband hold title as joint tenants with rights of survivorship so that the surviving spouse would have 100% ownership without involving probating the home.

Another option would be to hold title to your home in a Revocable Trust. Any asset held in trust would be immediately available to your beneficiaries upon your passing. Assets in a Revocable Trust skip the probate process, thus keeping your estate private and allowing your assets to be given to your heirs quickly.

You should review your estate planning with a professional.

Published in: on March 30, 2010 at 10:51 am  Leave a Comment  
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Purchasing Property with a Partner? Check this out.

Q. I would like to purchase a piece of real estate with my business partner.  How should we address the issue of what happens with the real estate upon the death of one of us?

A. You could take title as “tenants in common”, rather than “joint tenants with rights of survivorship”.  This would ensure that your share of the property would pass to your heirs, as outlined in your will, instead of transferring to your partner automatically.  I would recommend that you each update your wills to be sure you address this important issue.

Another option would be to for a Limited Liability Company or Corporation.  Both of these will allow you to structure the formation documents in a manner that protects each partners interest and you and also incorporate a Buy/Sell Agreement.  Make sure to speak to your financial lender in advance as many lenders do not allow you to purchase or refinance certain types of property while owned by a LLC or Corp.

Your real estate is generally one of the most valuable assets you may own, make sure to take the proper precautions to protect your interest and those of your heirs.

As with any legal issue, the advice of a trained professional is always beneficial.  Our firm is a full service law firm covering such legal matters as personal injury and estate planning.  If we can assist you, please call or visit our website.

Published in: on March 8, 2010 at 10:59 am  Leave a Comment