What is my business worth? If this is not the first question business brokers are asked by someone considering selling their company, it’s the second one.

The truthful answer is… whatever someone will pay for it. Someone, be it an individual or another company, will pay a fair and realistic price and not too much more than that. Especially if the money is coming from a strategic buyer's cash flow, or an individual's savings, 401k, a relative or a lender. Definitely if the lender is providing an SBA backed loan. Unlike buying a car, a boat or a house, buying an existing business is more often than not, less about impulse and emotion and more about the numbers. In fact, in many cases if it’s not all about the numbers, it will be almost all about the numbers.

This is where there may be a little wiggle-room, depending on the nature of your business and the steps you’ve taken to prepare your business for being sold.

Remember: “Not everything that can be counted counts. And not everything that counts can be counted”

What are the things that can be “Counted” in your business?

First and foremost, the financial health of the business, both past and present. Prospective buyers and their lenders—incidentally, it is a common misconception that most buyers of small businesses simply write a check. Most of the folks who buy a small business preserve cash to meet day-to-day operating expenses until they are confident the cash flow will meet these needs.

So let’s get started…

1 - Get your financial house in order

In other words, have three years of clear and accurate “financials”. These include a Balance Sheet, Income Statement and Profit & Loss Statement for each of the previous three years. If these reports can be broken down by month it is even better. In addition, buyers and lenders will also want to see federal tax returns for the previous three years of business. In many small businesses whoever is responsible for bookkeeping or accounting should be able to produce these reports fairly quickly.

If financial statements and tax returns are not available for the previous three years, whatever financial records are available will suffice. Although the reality is that businesses with less than three years of financial data and tax returns tend to be perceived as a riskier investment in the eyes of prospective buyers and their lenders, especially if the lender is working with the SBA.

2 - Know the value of your assets

Legacy Assets 360 tends to focus on industrial and small manufacturing businesses and as such, represent clients with significant investments in tangible physical assets like machinery, equipment and fixtures. We do, however occasionally represent businesses with a unique service or product and as such there may be important intangible assets such as intellectual property, patented products, proprietary processes, special professional relationships or goodwill in a niche market.

Regardless of the type and nature of the business assets, it is essential to create an estimate of the value of the business’s tangible and intangible assets. Both evaluations should, if possible, be supported with market research—if available. Serious prospective buyers will request a detailed inventory list of the tangible business assets with an estimate of value for each item. Legacy Assets 360 can assist in this process. Incidentally, the importance of this step is confirmed by the fact that virtually all lenders will require a current third-party appraisal prior to the opening of escrow.

Legacy Assets 360 can help you develop a clear understanding of the “the part of your business that can be “counted”. At no cost to you, we will provide a “Broker’s Opinion of Value” of your business. We will also, at no cost to you, make recommendations as to how you might increase the overall value of your business in a relatively short time.

Now on to several important things that count but can’t be counted…

3 - A Professional and Realistic Business Plan

Wait a minute, isn’t that the buyer’s responsibility? The short answer is, yes. But the reality is a lender will probably want to see the seller’s current business plan as well. The presumption being that an organized, well-run and profitable business is a better investment. The better the investment, the lower the perceived risk. Remember, for the buyer’s lender it’s all about risk.

4 - Your Business Through the Eyes of a Prospective Buyer

Our experience suggests a potential buyer will give the appearance of a business as much weight as the appearance of the financial docs. Especially if the business is listed at a price that it a realistic multiple of SDE* or EBITDA*. We’ve all heard the real estate reference to “curb appeal”. If bankers are “numbers people” you ask, why worry about the “curb appeal”?

Which leads to one more well-known aphorism, “you never get a second chance to make a good first impression”.  Would you pay full price for a house that didn’t look well-maintained?  Especially if you had an opportunity to look inside. Needs paint, the kitchen is dated and the windows need to be replaced. The heater and AC are a bit long in the tooth. All of these factors and their ultimate cost to the buyer go into the offer. And, sticking with the analogy of selling a home, the longer we've lived in our home, the less we notice. It's simply human nature. Heck, my office is a bit cluttered and maybe a newer desk would look good (just ask my wife!)  but I'm comfortable and everything works.  This mindset applies to many small businesses as well

5 - Be prepared to put on your “Banker’s Hat” - Seller Financing

Most small business owners who decided to sell their business—especially owners who have built their company from scratch but have never sold a business—expect the buyer to write a check for the full selling price. Rarely does this happen. In fact, most buyers of small businesses are themselves just starting out and need to retain as must working-capital as possible to meet day-to-day operating expenses. Typically most small businesses are purchased with a lender providing up to 80% of the purchase price. In addition, as a sign of the seller’s confidence in the deal, most lenders will require the seller to finance a percentage of the remaining amount to be financed. If the SBA is involved, seller-financing of 5% to 10% for a term of at least twelve months will be virtually mandatory.

The good news is that any percentage of seller-financing will significantly increase the pool of potential buyers and willing lenders.

6 - A Winning Team

At Legacy Assets 360 our goal is to create a team with you, your business broker, a qualified and motivated buyer and the lender. It has been our experience that if all parties are reasonable, respectful and motivated, the deal will get done to everyone’s satisfaction.

With the realities noted above in mind, you may be able to reduce the time spent on due-diligence, improve the lender’s perception of the risk associated with the purchase loan, and potentially reduce the overall time required to complete the sale of your business.

* SDE - Seller’s Discretionary Earnings

* EBIDTA - Earnings Before Interest, Depreciation Taxes & Amortization