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Days on market not a factor when buying a business

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Days on Market


In residential real estate a key factor in the perceived value of a piece of property is “days on market” – sometimes abbreviated as DOM. In Business Brokerage DOM is not a major factor. In fact, in Florida our MLS does not even track how many days a particular business has been listed.

Here is why. Say you have a 4 bedroom 2 bathroom house with a pool in a nice neighborhood. One year from now it’s still a 4br/2ba house with a pool and in a nice neighborhood (unless something has changed drastically). Since the property for sale has not changed dramatically its failure to sell must be an indication of a problem. Most likely it has been overpriced or is undesirable for some other reason. Certainly that will be the perception.

But a business is a different matter. A thriving business this year might be a bust next year. A business barely threading water this year might be thriving next year. Customers can be lost or added, new products released, market conditions can change, contracts gained or lost. A million things can happen to change the value of a business. Because of this it follows that the DOM is not key factor in the desirability of a business. Instead buyers look for the latest financial trends and will respond positively to a business on the upswing.

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Reasons to sell your business

It is important for a business owner to be able to communicate the reason they want to sell. This is something buyers need to know. There are three good reasons to sell a business.

Retirement – you have built your business, you are happy with its value and have no one to leave it to.

Personal matters – such as poor health, a need to relocate or divorce.

Industry changes -The industry has changed and the company needs someone with the skills to keep up with these changes.

There are other reasons that will give a buyer cause for concern.

Boredom or fatigue – The buyer will wonder “how long before I am bored” or “Is this business too taxing for me”

Poor financial performance – No one wants to buy your headache. A business in decline will have few takers and will only sell at a fire sale price.

Other business interests – Selling your business because you have other business interests or are excited about starting a new career. Hearing this will make the buyer wonder if they too shouldn’t be looking into something else.

Loss of key personnel – Selling your business because you recently lost key personnel. This will not be an attractive proposition for a buyer. Buyers look for key stable employees to help them with the transition.

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Business Broker as a career


In Florida an agent who assists buyers or sellers in the sale of a business is referred to as a “Business Intermediary”. While we are often colloquially referred to as Business Brokers – in fact it is only the principal licensed Broker in the agency who is a Business Broker. Agents working under the Broker are properly referred to as Business Intermediaries. Here I will use the terms interchangeably as I discuss the profession. This is what you need to know when entering this career.

Financially secure

Business Intermediaries typically work as Independent Contractors and are paid a percentage of the Brokers commission. So don’t expect a weekly paycheck. In fact you may not make your first paycheck for a year or so. Statistics show that the average business that sells in the state of Florida has been on the market for 277 days. So if you start today as a business broker. List your first business within 30 days and are lucky enough to sell this business you can expect that your first paycheck may come at the 10 month mark. And that’s if you are lucky. Most Brokers do not experience a steady income until year two or three. So unless you are financially independent or have another source of income this profession may not be right for you.

Licensing

Some states do not require a business broker be licensed. For a list of these States see here. However Florida requires Business Brokers have a Real Estate Sales Associates license. It is illegal for anyone to act as a Business Intermediary in Florida unless they have a Florida Real Estate license.

Skills

You should have a good knowledge of financial matters. That is being able to read a tax return, balance sheet and profit & loss statement. Business Brokers analyze businesses to determine their true cash flow. If you don’t already have these talents then you will need to acquire them.

Patience

As stated before this is not a get rich quick profession. It takes patience to be successful. If you are looking for a quick payout this may not be the profession for you.

Employer

Make sure you hang your license with a Broker who is a member of the Business Brokers of Florida. This association sets minimum ethical and educational standards for business brokers in this State. As a member you will have access to a multiple listing service that currently has almost 4,000 businesses for sale listings.

A willingness to learn

Our profession is constantly changing. Each business is as different as its owner. You must never stop expanding your knowledge.

If you think you have what it takes to be a Business Intermediary Florida Business Exchange is currently looking for suitable applicants.

To explore a career as Business Broker/Intermediary contact Anthony Rigney at 904-725-7677.

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How much is my business worth?

There are many factors that determine the value of a business. But the actual value is what a buyer is willing to pay and a seller is willing to accept.

The main reason a buyer will want to buy your business is the amount of owner benefit they can expect to derive from it. Owner benefit can be realized in a number of ways.

1. Cash flow – the amount of expendable cash they will have available to cover the owner’s salary, debt service and return on investment in the form of profit

2. Tax benefits – the ability to write off depreciation, amortization, interest payment and other expenses such as meals, trips and automobiles.

3. Personal benefits – the ability to have the business pay for life insurance, health insurance and retirement benefits.

The more benefits that can be derived from a business the more a buyer will be willing to pay for it. While there are rules of thumb of each industry, every business is unique. Every buyer is unique too and they will buy the business if they feel it meets their needs.

The best formula for valuing a business is the “asset test”. This formula has been around for a long time but it is still valid today. The acid test looks at the amount of time it will take a buyer to recoup their investment while accounting for a reasonable owner’s salary and debt service.

Here is an example of the asset test applied to a business

Price $600,000

Down payment $120,000

Borrowed money $480,000

Owner benefit $214,000

Reasonable owner salary $74,000

Annual Debt Service $61,000

Annual return $79,000 (owner benefit – salary – debt service)


In this case the annual return on the seller’s cash investment is 66% and the initial cash investment will be paid off in less than two years. The return on total investment is 13.2%. This would be an excellent investment and this business is likely to sell quickly.

There are other conditions that must also be considered. Such as capital assets, inventory on hand, deferred capital investment, changes in the industry and general economic conditions. However the acid test provides a good benchmark for determining a business’s value.

Many sellers develop an emotional attachment to their business and believe they should be paid more because of the “blood, sweat and tears” they have put into building it. But a business is only worth what the marketplace will bear.

Here are some other factors that will affect the value of a business.

1.The ease or difficulty with which someone can start the same type of business

2.The amount of competition in your industry

3.Industry trends

4.The level of risk a buyer will assume

In valuing a business special consideration should be given to comparable sales. That is the sold price of similar businesses. A professional Business Broker can help you ascertain the likely selling price of your business. They also have the skills necessary to guide you through the process to a successful sale.

How much is my business worth? by Anthony John Rigney PA

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5 Hottest Selling Businesses in Florida

Five hottest selling businesses in the State of Florida

1. Medical
2. Manufacturing
3. Construction
4. Distribution
5. Insurance


Based on data provided by the Business Brokers of Florida (BBF). Not a reflection of the total number of businesses sold. This ranking is based on the ratio of businesses sold to businesses listed in each respective category.

Anthony John Rigney PA is a Business Broker and Board Certified Intermediary in Jacksonville Florida.

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Buying or selling a business is a complex process. Make sure you have the right team on your side. Contact us today!