Inventory: A Key Component to the Business Sale

Written by Ralana D. Shelley, CBI March 28, 2011 Article 5 in the "Prepare Your Business For Sale: Everyday Business Issues" series... One of the most overlooked but important issues in the health of any business is inventory. Inventory plays a pivotal role throughout its entire lifecycle, from purchase to storage to sale. It is just as important how inventory is kept and sold as who it is bought from, how much is paid for it, and how much one can charge a customer for it. Below are three key issues to consider about inventory and how it affects the health and future sale of your business. Inventory Accounting... Once a business has purchased its inventory, it becomes important how that business is going to handle it. How quickly or slowly it is turned over can have a direct impact on business value... To include in the purchase price or not to include... Most businesses offered through an intermediary will clearly state up front whether inventory is included in the purchase price, or whether it is in addition to the price... Counting Inventory at Closing... There are basically two ways to count inventory before closing... Inventory is not so simple when considering its impact on the value of a business both while running it and while trying to sell it. It is certainly somethign to handle and track carefully, and prepare it you are thinking of selling your business now or in the future. to read the full article and learn more about inventory's impact... click here.

The Hidden Values in Your Business

Surveys have shown that a majority of business owners have no idea what their business is worth, that they have a majority of their net worth tied up in their business, and that they do not have an exit strategy. A business broker professional is a good person to call on to get an idea of what the business might sell for in the marketplace.

Certainly, the financials carry a lot of weight in figuring what a particular business will bring in the marketplace. However, a professional business broker can also tell you about those hidden values your business most likely possesses. It's these hidden values that often capture the interest of buyers and make a business more valuable than what the numbers suggest. Keep them in mind when placing a price on your business, and make sure that a prospective buyer is made aware of them. They might be called the non-financial value of the business.

To learn more about the specific hidden values read the full article... click here.

Buying a Business: 5 Things You Need to Know

Buying a existing business can be easier than starting one from scratch. How to find the right opportunity, raise enough money, and get a good price.

By Darren Dahl
With increasing signs that the economy is improving, and the credit markets beginning to loosen up again, the business-for-sale market is sure to see an uptick. In fact, the number of businesses sold during the first quarter of 2010 rose 6.3 percent over the fourth quarter of last year, according to BizBuySell, an online marketplace for business postings. Sometimes, buying an existing business can be a lot easier than starting one from scratch. What are the best ways to get started? Here are five things you need to know.

1. Know what kind of business is right for you.
2. Line up your financing ahead of time.
3. Assemble a team of professionals.
4. Place a value on the business.
5. Start looking and spread the word.

To read the full article click here...

Then, let's discuss...

Selling When Business Valuations Are Low

Selling When Business Valuations Are Low

By DIANA RANSOM

Investors weren't the only losers when the stock market crashed last September. Business owners also watched their company valuations plummet.

Timothy Butler, the president and chief executive of Tego, an RFID chip maker in Waltham, Mass., saw his firm's value fall quickly with the market's downturn. Moreover, the recession spooked venture investors. Before the crash, Butler had expected to land investment funds in the range of $1.5 million to $2 million. Instead, he says his firm wound up with just a third of that amount in its coffers.

"It was a very difficult time," Butler says. "We reduced salaries temporarily. We had to cut certain projects and renegotiate the timing and paying of creditors. And we had to rewrite our business plan to recognize current realities."

Many firms turned to equity financing during the downturn to make up for their cash shortage. That solution can help keep a business afloat, but each time this type of funding is raised, a company must be appraised, says Jeffery Sohl, the director of the University of New Hampshire's Center for Venture Research. If owners revaluate their companies when values are lower, they may have to hand over more ownership in the company because the same amount of money buys more when values sink, he says.

In an effort to shore up his firm's valuation, Butler decided to forgo traditional equity financing. Instead, he issued convertible debt, which is seen as less risky than regular equity investments. The strategy has paid off. Since February, Butler has managed to raise $1 million in debt financing.

Butler was able to avoid a lower valuation, but many other business owners — especially those who are older and angling for retirement — haven't been so lucky. In the second quarter, the median sale price for completed business sales dropped 20% to $160,000, from $200,000 the year before, according to BizBuySell.com, a web site that tracks business sales. "There's no question that it's a challenging environment," says Anthony J. Citrolo, a principal at New York Business Brokerage, a business brokerage firm in Melville, N.Y. "If the last three or four quarters haven't been great, some owners [looking to sell now] will have to accept about 12% to 15% less than what they would have gotten a year ago," he says.

Still, low valuations aren't impossible to overcome, says Citrolo. In fact, they might even benefit some business owners, he says. Here are three ways to sell your business when values are low:

Keep it in the family
For business owners who want to keep their companies in the family, now may be an ideal time to hand over the reins, says Matt Painter, a tax partner at LBMC, an accounting firm in Brentwood, Tenn. The total amount any one person is allowed to give away as a gift, tax free, over his or her lifetime is $1 million. So at this point, business owners can effectively give away a larger percentage of their businesses because valuations are lower, Painter says.

Let's say a business that was worth $2 million a year ago was broken down into 10,000 shares worth $200 each. Let's also say that business lost 20% of its value after the downturn, sinking the firm's shares to $160 each. So instead of being restricted to giving away 5,000 shares (to stay within the $1 million exclusion), the owner can now give away a larger percentage of her business (6,250 shares) to her children. The move could also mean a windfall in the recovery. "Depressed values are [likely] going to bounce back," Painter says.

Transition to employees
At a time when buyers are scarce, another option for owners is to sell the firm to its employees. Of course, buying a business on the spot is likely a stretch for cash-strapped workers. In addition, taxes, which are payable by employees, kick in on stock transfers to employees, says Matt Vandenack, an attorney who counsels small-business customers for the Principal Financial Group in Des Moines, Iowa. Still, as valuations are lower, so are taxes, he says. As a result, employees may be more willing to purchase the company via stock transfers today, Vandenack says. "It's an opportunity to get into the business for cheap," he says. "If you sell them a portion of the business today, that percentage of the business will presumably increase. And even if the company's value goes up before [employees] finish buying it, they've at least gotten a discount on a portion of the business."

Sell with earning potential
Getting anyone to pay for a business in full is a tough proposition these days. And although seller financing — transactions in which sellers agree to hand over the business in return for installment payments — has picked up steam, it doesn't encourage business owners with low-valued businesses to sell. Instead, many owners are increasingly turning to transactions known as "earn outs" in which business owners agree to sell their lower valued firms today in exchange for a cut of the company's future profits, Citrolo says. Here's how it works: Sellers and buyers agree on future earnings targets. If buyers meet these targets, sellers receive some agreed upon percentage over and above the target value, Citrolo says. However, if the buyer doesn't meet his target, the seller still receives payment. "In effect, the buyer is hedging his bet," he says.

Entrepreneur's Journal: Building a business that Buffett would buy

Entrepreneur's Journal: Building a business that Buffett would buy
Posted Jun 14th 2009 12:00PM by Tom Taulli

While in an airport bookstore recently, this title caught me eye: How to Build a Business Warren Buffett Would Buy: The R.C. Willey Story.

How could I resist? I bought a copy and read the whole thing on my flight (OK, the book is only 192 pages).

The author of the book, Jeff Benedict, tracks the entrepreneurial career of Bill Child, who transformed a furniture business -- R.C. Willey -- into a retailing giant (he came on board the company in the mid 1950s when his father-in-law died).

It's certainly an inspirational story. I also think it's instructive in today's times when entrepreneurs need lots of inspiration. Keep in mind that when Child took over R.C. Willey, the company was in shambles. The debt was suffocating, customers weren't paying their bills, and it looked like the only alternative was liquidation.

Well, failure wasn't an option for Child. Rather, he focused on key business fundamentals that would eventually catch the attention of Warren Buffett, who bought the company in 1995 for a cool $175 million.

So, what are some of the lessons? As should be expected, they are old-school approaches (hey, that's made Buffett a billionaire, right?).

Let's take a look:

Debt can be a bad thing: Child spent years finding ways to pay down debt. It meant lowering costs, improving customer service, and thinking hard about making new investments.

Thus, by having a conservative balance sheet, Child was able to deal with recessions and competitive threats. He was also able to capitalize on new opportunities, such as building a large distribution center (which was key to R.C. Willey's growth).

Honesty: According to Child, "Nothing sinks a reputation faster than dishonesty. It takes years to build a reputation, but it can be destroyed in one day over one misdeed."

Especially in today's world -- with the pervasiveness of the Internet -- a bad policy can be deadly. However, by being honest, there will be trust with customers, suppliers, and partners. Such relationships are critical for any sustainable business.

Details: Retail is an incredibly tough business. As Buffett once said, "In retail, you need to be good every day." Actually, I think this applies to any business.

Now, this does not mean you need to hit a home run every day. Instead, it's about having little victories. Over time, they can really add up.

As for Child, he did hire capable people. But he was intensely engaged in the day-to-day activities. There was little he did not know about the business, even as it became a billion-dollar operation.

Value proposition: What do you offer customers that your competition does not? It's a tough question, but it's something you need to think about. If there is no good answer, then you need to make some big changes.

Says Child: "Offer customers true value on quality products. A low price on a cheap piece of furniture is not value."

Tom Taulli is the author of various books, including The Complete M&A Handbook, and the founder of BizEquity, a free online business valuation tool for small businesses. You can reach him at his personal blog.

Meridian Valuation Services

Looking for a business valuation, equipment appraisal or equipment brokerage? Check out Meridian Valuation Services. I have known and worked with Ed for many years and can highly endorse his professionalism, hard work and honesty.

Click HERE to view the website.

Meridian Valuation Services

Click here: Meridian Valuation Services

Looking for a business valuation, equipment appraisal or equipment brokerage? Check out Meridian Valuation Services. I have known and worked with Ed for many years and can highly endorse his professionalism, hard work and honesty.

Owner's Cash Flow: The Keystone of an Analysis of A Business

If you get five "experts" on business valuation in a room and give them a business to "value" you will probably get 5 wildly varying opinions as to the worth of the business. Business valuation is an art not a science. The bottom line is that a business is only worth what it will bring on the market. The tricky part is determining where the "market" is at in regard to that particular business. There are indeed "flavors of the month" as the popularity of certain types of businesses ebbs and flows. Among the many factors to look at the keystone of an analysis of a business is "owners cash flow" which can be simply described as what the owner of the business is taking out of the business directly or indirectly or the total sum of all the economic benefits which are derived from the ownership of the business. Sometimes it takes a little detective work to find out what this true number may be as often tax returns are adjusted for tax minimization. Typically cash flow is determined by adding together Owner's direct compensation + owner's benefits (direct and indirect), depreciation, amortization, interest, non-recurring expenses, plus net income. The sums of these numbers will give you a good starting point in determining the economic benefit being derived from owning that particular business.