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Buying or selling: What’s the business worth?

By LISA MONTI

San Francisco-based BizBuySell.com, which calls itself the Internet’s largest business-for-sale marketplace, reported recently that “the total number of small businesses changing hands in the first half of 2016 represents an increase from not only last year, but from the record-setting 2014 as well.”

The company said 1,935 sales were reported in the second quarter of 2016, bringing the year-to-date total to 3,775. That’s up slightly from the 3,743 transactions reported in the first half of 2015. If this pace holds up, the company said, 2016 could see more sales than in 2014, when it reported a record 3,755 transactions in the first six months  of that year.

According to Sunbelt Business Brokers, which has franchise offices in Biloxi, Ridgeland and Hattiesburg, buying a business rather than starting one from scratch has its advantages, including existing cash flow and employees in place at an established location. It’s often easier to get financing to buy a business rather than start one, according to the company.

So if you’re an owner who wants to sell, how do you figure out how much your small business is worth? It’s a simple-sounding question, but coming up with a reasonable price is a complicated process.

“Really, there is no simple answer on how much a business is worth,” said Joshua Covacevich, the senior broker in the Biloxi office of Sunbelt.

To begin with, there may be an unrealistic expectation about the value on the part of the owner. Entrepreneurs who have toiled to get a business up and running and then worked hard to keep it going may have a tendency to inflate the value of their shop or plant.

“They’ve built it from the ground up and sometimes they’re a little surprised that the value is not quite as high as they expected. But from the buyers standpoint, if they feel they can’t get a good enough return, the business is not going to sell,” he said.

There also are value considerations such as the size of the business, the services or products it offers, its location and the general state of the economy.

“But the main factor is going to be the cash flow,“ said Covacevich. He also said that  seller’s discretionary earnings – essentially gross profits plus the owner’s compensation plus anything that’s not a true business expense – is the most accurate way to determine a sale price.

Figuring a sale price takes market research as well. Brokers will look at the sales prices of businesses in the area over a period of 15 years or so to calculate a price in the current market.

Covacevich said profitability and the opportunity to expand revenues should be considered in calculating a sale price. “Competition affects the value of a business, and also the diversity of customers, or the lack thereof,” he said. A business should have a large and diverse customer base. If a company is making a healthy profit but has only one or two major customers, that can be a red flag for buyers, he said.

Another factor is the fair market value of assets such as furniture, fixtures, equipment and inventory. “In some businesses and industries that are more service based, the value of assets is not going to have much effect. Others like a trucking company, for example, have a lot of value in vehicles, equipment, etc.”

Calculating a sales price isn’t only about numbers. “There are going to be some judgment calls: how marketable it is, the area it’s in, is the industry on the uptick? Is the business in a booming new area, or is it in a dying downtown area?”

Selling a business isn’t fast either. He said the national average timetable from the day the business is listed to the day money changes hands is approximately nine months.

“There are negotiations on price and the terms of the acquisition. Then there is financing and the bank process to go through. Then the closing attorney has to prepare all the documents, and the buyer does due diligence which can take a month or two to dive deeply into the financial records to check everything they can. That’s how complex a deal it is.”

Covacevich said in the Biloxi market, business sales have been slightly increasing.

“Right now from the seller’s side it’s been pretty steady, but I have noticed the number of buyers has picked up in the last six months or so.”

Buyers are looking for all types of businesses, he said. “Recently we’ve got a lot of calls from people looking for convenience stores/gas stations and liquor stores. And restaurants are always fairly popular from the buyers side. People are always looking for opportunities in restaurants.”

About Lisa Monti

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