Risk vs. Price

Some buyers look for the “perfect business” (high profits, low risk, great potential, easy to run, and no problems). If such a business is ever found, the price will be high, and the competition from well financed industry professionals and corporate buyers will abound.

 

Other buyers look for very inexpensive businesses, often failing and preparing to close. These businesses are high risk and usually involve a significant amount of additional capital to make the business profitable. These too, are best left to industry professionals or corporate buyers who can afford the cost and the risk.

 

Our organization sells only those businesses which meet the following criteria:

 

  • Appeal to the Senior Level Executive mind-set

  • Provide a Six-figure Income Opportunity to the Candidate

  • Recession-Proof and/or Recession-Resistant

  • Possesses a solid Business Plan

 

Personal Business Advisors searches to locate businesses that are well established, have identifiable opportunities for financial growth, and have a committed and reasonable seller.

 

 

Pricing a Business

 

Price is in most cases related to cash flow and varies with the agreed upon financing terms. Price will also depend on the type of business, the value of the combined assets, general attractiveness of the business, and the future potential. True market value is what a buyer agrees to pay and a seller agrees to accept without undue pressure.

 

Privately held business owners attempt to minimize their tax consequences to maximize their financial benefits. Given and accepting these circumstances, correlates to the businesses financial statements (books and records) being “Recast” or “Normalized” to reflect the true picture of the businesses income producing capabilities (Discretionary Earnings, or DE). This means working between the lines to add back to profitability all of the legally taken charges to expenses that weren’t necessary or will not be taken by the buyer in the future. There are many methods of pricing a business. The most commonly used are:

 

Cash Flow Method

A multiple of the annual cash flow (which we refer to as Discretionary Earnings or “DE”, or Earnings Before Interest and Taxes or “EBIT”).  This multiple can vary widely depending on the business, the industry trend, and the economy.

 

Asset Method

A combination of “Furniture, Fixtures, and Equipment” (FF&E), the inventory and multiple of Discretionary Earnings (DE).

 

Gross Sales Method

3 – 12 months gross sales; again dependent upon the business, the industry trend, and the economy.

 

Comparable Sales / Market Method

This method compares sales of similar businesses and also the valuation multiples from these acquisitions. An adequate number of comparable companies are necessary to produce credible results.

Personal Business Advisors acts as an intermediary for candidates to locate businesses that are well established, have identifiable opportunities for financial growth, and have a committed and reasonable seller; however, we recommend all parties seek professional counsel when entering into an agreement to purchase/sell.  We are always seeking to add businesses, which meet our stated criteria, to become a part of the portfolio presented to our candidates.  Contact us.