Bi-Weekly Roundup
Big news in the world of buying and selling businesses as we have a government shut down to tangle with which historically will stall SBA processing. The good news is banks are still accepting applications and working on processing, so if this shutdown is like others it should provide minimal interruption
Additionally, Scott Curtis from our FCBB Charlotte location has agreed to have his listings published on the newsletter which gives the prospective buyers more potential businesses to review to find their next great opportunity.
From our office we placed one under contract last month with our trash business listing going in to escrow. We’ve still got some great businesses out there for you to check out below!
Buyer tip
Valuation
This one could fill the next dozen newsletters, but I did want to consolidate a few helpful tips for buyers trying to calculate valuation.
1.) There’s secondary data (bizbuysell for example) that relies on broker feedback on how much they sold the deal for and how much the cash flow was. There’s two flaws if you’re leaning on this for valuation. First, You have no deeper insight in to the actual data which means you are unable to separate apples in oranges. Second, it assumes the input values are accurate.
2.) There’s primary data. Peer comps for example uses SBA loan data to provide more accurate comps to guide valuation. This data is far more accurate for what a deal is going to go for and can be refined for recency, relevancy, and size to guide the multiple. If you’re not going to spring for a peer comps subscription, at least ask the broker how they reached their valuation and for supporting documentation.
3.) Depreciation is not a line item expense and it should be excluded from SDE/EBITDA (Earnings Before Interest Taxes Depreciation Amortization). If a seller had 200k in SDE and wrote down 80k in depreciation, that is still a 200k cash flow business and should be valued as such.
4.) Remember you’re paying for how the business is performing, but your reason to buy likely stems from what upside you may think is present, so don’t lose out on a high potential deal because you’re trying to get the multiple low and get a bargain. Remember Warren Buffet’s line -"It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price"
Seller tip
Key documents for completing valuation
If you’re preparing to get your financials ready to get a valuation, here’s what you can have ready to stay ahead of the curve
Last 3 complete years Profit/Loss reports, by month if possible
If you don’t have these you can use a form 1120 tax form, and you’ll need it ready for due diligence
If you don’t have either and keep your financials separate you can work with a CPA to create the records retroactively
Profit Loss YTD for current year
Most Recent Balance Sheet
Equipment/Inventory list
If you are beyond a year out from looking to sell now is the time to be sure that if you have any cash transactions they are making their way to your reported income. There’s no addback for unreported cash sales and they don’t inspire confidence from buyers. You may save 15 cents per dollar in taxes that year, but you’ll likely lose 2 to 3 dollars per dollar in valuation when you sell the business.
Listings for sale
The deals are out there….
Visit us at westcharlotte.fcbb.com
Contact the author at 704-238-7270 or [email protected]