Structuring the Sale

·       The four major types of potential buyers and what they are looking for in a prospective acquisition.

·       The four types of business valuations and which one is most appropriate for your business.

·       The “Rule of Thumb” methods for pricing a Main Street Business (a typical small business).

·       The four primary categories of business types, and where your business fits in.

·       The optimal time to sell your company.

As a business owner, your job throughout the process will be made much easier with the right professional guidance. Owners who try to sell their business on their own typically get distracted from operating the business, which can cause the company to lose value and falter. The owner’s attention is focused on the wrong thing, and the business suffers.

It’s not luck that leads to finding a qualified buyer at the best possible price. People who work every day in business sales, people like VR Business Brokers of Fort Worth/Arlington know how to present a company’s true value. Professionals know how to position your company as an outstanding opportunity for the right buyer. That’s why VR has successfully transacted more than 100,000 sales.

In structuring your business for possible sale, we take a measured approach. We understand that most Main Street business owners use every legal technique to minimize their taxes or in other words “live out of the business”. That’s why the financial records of the typical Main Street business need to be recast to give an accurate picture of the true benefits for the owners and of the company’s money-making capability. This is why we look between the lines to add back to the taxable profits all the owner-discretionary expenses that, while legally taken, weren’t absolutely necessary. We analyze the company’s cash flow to put it on equal footing with other businesses, regardless of how each owner takes out profits.

Typically, VR Business Brokers of Fort Worth/Arlington defines cash flow as earnings before interest, tax, depreciation, amortization, total owner's compensation, and other owner benefits. These are professionally termed as Seller's Discretionary Earnings (SDE). This is the total amount of money an owner has available to pay himself or herself, to invest in additional equipment, to make the note payments on the business, and to pay income taxes. Your VR representative will be happy to explain this process in greater detail for you as we move forward.

As is true with any commodity, a business is worth whatever a willing buyer will pay a willing seller in a free marketplace. However, the value of most businesses is determined by what someone can afford to pay for it. Typically, this price will be a multiple of the annual cash flow for Main Street businesses after recasting the Seller's Discretionary Earnings, as we described earlier. The price will typically include a one-third to one-half down payment, and a note to the seller that is paid off over a 5- to 10- year period. There are many "Rule of Thumb" methods for pricing a small (Main Street) business. The most commonly used are:

·       Cash Flow Method - a multiple of annual SDE or EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) plus owner's compensation. The multiple can vary widely depending on the business.

·       Value Method - Value of equipment and inventory plus goodwill (one year's cash flow).

·       Gross Sales Method - A multiple of monthly or annual gross sales, depending on
type of business.

In addition, you need to know where your company fits into the world of business in order to understand the dynamics of a possible sale. The rules that govern the sale of major public companies such as Microsoft or General Electric have very little in common with the rules that control the sale of a private company. Here is an overview of the market rules that control the sale of the four major types of businesses:

Main Street. These smaller companies are sometimes called “Mom and Pop” businesses because the owners are the key managers.  Main Street businesses are the backbone of the American economy, and there is an active buy-and-sell marketplace for these businesses. Typically, the acquisition rules to buy a Main Street business are not formalized, but follow the “Rule of Thumb” methods we mentioned earlier. What is the biggest stumbling block to selling a Main Street business successfully? Overcoming the buyer’s perception of risk. A typical Main Street business has these characteristics:

·       Earnings - $100K, more or less. Expressed as SDE or Discretionary Cash Flow (how much money the business generates when the owner's desire to reduce taxes is eliminated through recasting the financial statements).

·       Price to Earnings (P/E) Ratios - 1 to 4 times SDE

·       Terms of sale - Down payment of 75% - 100% of SDE, plus a seller's note for the balance over a 3 to 7 year period

·       Management - Owner wears most of the hats.

Upper Main Street. While still a small business, an Upper Main Street business has been in business for many years and reached a level of maturity often equaling Middle Market companies. The average Upper Main Street company demonstrates consistent earnings and has a solid organizational structure. The owner is involved in the company’s day-to-day management, just like in the Main Street business. As with the Main Street businesses, comparable sales data is limited. However, the average Upper Main Street business has:

·       Earnings -Greater than $100K, less than $250K Earnings Before Interest and Taxes (EBIT).

·       P/E Ratios - 3 to 7 times earnings

·       Terms of sale - Down payment of 1-2 times earnings, plus a seller's note. Sometimes lender financing (SBA or other) for a substantial portion of the price is available.

·       Management - Owner plays a key role in company's operation.

Middle Market. The Middle Market company is typically a substantialprivately held company that often earns profits comparable to Wall Street firms. However, it is misleading to compare a privately held Middle Market company with a public company for sales purposes. Unlike a public company, the private Middle Market business does not actively trade its stock and liquidity issues affect their sale. Because of this and other factors, Middle Market companies are the most difficult companies to sell. On average, a Middle Market company looks like this:

·       Earnings - $250K to small millions (various EBITs)

·       P/E Ratios - 3 to 15 times earnings

·       Terms of sale - Cash or the same structure as Upper Main Street deals

·       Management - Structured and disciplined. Owner involvement varies.

Wall Street. As you know well, these are very large public companies traded on stock exchanges around the world. The rules for their acquisition are taught in businesses schools and their mergers and acquisitions are typically handled by investment banking firms. The objective of the Wall Street company is to maximize shareholder value. Wall Street companies are characterized as follows:

·       Earnings - Measured in millions, after taxes

·       P/E Ratios - Typically more than 15 times earnings, often much higher (how much higher is mind-blowing; some Internet stocks are currently selling at a P/E of 450+)

·       Terms of sale - Cash or equivalents (stock, warrants, etc.)

·       Management - Professional, many layers.

VR Business Brokers of Fort Worth/Arlington focuses on the sale of Main Street, Upper Main Street and Middle Market companies. Our company takes pride in affording to these firms the professional assistance typically available only to Wall Street firms, but impossible to acquire as a small company. At VR, we treat your small company as a very big business!