Working with an experienced team of business brokers can help you find the right buyer if you are selling your business. On the other hand, if you are an entrepreneur who has not settled on a business idea, buying a business might be a sound option. You don’t have to start from scratch, and buying an existing business is less risky and much more affordable.
Now that you have decided to purchase an existing business, what are the things to consider when looking to buy a business?
Seller’s Discretionary Earnings
The basis of any valuation for main street and lower middle market businesses is a seller’s discretionary earnings (SDE) that represents a metric for determining the adjusted net cash flow of a business. SDE is the Total Owner Benefit that is available to a new owner to use in any way they see fit. It starts with the net profit from the most recent business tax return or the end of the year income statement, and non-cash expenses like depreciation and interest expenses are added back to increase the adjusted net profit. The Owner’s salary, personal perks which are expensed through the P&L will also be added back.
One of the most essential pieces of advice that we give to business buyers regards explaining how our customers can take depreciation on fixed assets during the first year even if the seller of the business has already depreciated assets. Examples of fixed assets that qualify for depreciation include Machinery, equipment, computers, appliances and furniture.
Retain Experienced Employees
Transparency is the key to retaining the most experienced and qualified employees. Typically, the business seller has not discussed the potential sale with every team member. Sunbelt recommends having an all staff meeting on the day of the closing (or the day before) where the Seller and Buyer announce the sale and rehire all employees under with the same salaries, benefits, etc. You don’t want to take over a business that loses most, if not all, of its best employees. It is important to get the message across that nothing will change going forward except some possible new employee friendly policy changes.
Since confidentiality is an essential element of buying a business, you should leave the employees out of the communication loop for anything that doesn’t pertain exclusively to them.
As an entrepreneur, taking over an existing business should make creating a growth strategy a high priority. Your Broker should be able to provide you with several new opportunities to grow the business going forward. Generally, the original founder knows what to do but has not had the time or bandwidth to pull it off. Buying a business with staying power gives you a better opportunity to grow sales.
We’re also referring to consumer acceptance. The reputation of a business you are considering buying is important because it demonstrates how loyal customers have developed through the years. To determine the importance of a business, read the reviews left on sites such as Yelp and Google and check the Better Business Bureau (BBB) page of the business. A business that has earned a reputation of A+ from the BBB is a possible acquisition candidate.
Sunbelt markets over 200 business-for-sale portals, and we spend a lot of money marketing your business for sale, which is why we are so selective about the listings we present. We offer custom deal structures, dedicated financial advisors, and compelling marketing assets that get our customers the best price for their business. Sunbelt takes the time to pre-screen every buyer by establishing a profile and receiving a Personal Financial Statement (PFS). Because we do the original legwork, you get a head start on selling your business.
Contact Sunbelt Business Brokers of Naples for a free valuation & consultation.