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Buying or Selling a Business--TOP 4 CRITICAL SUCCESS FACTORS

Posted by Michelle Mize on Thu, Jul 28, 2011 @ 05:14 PM
  
  
  
  

2011 is proving to be a stronger year than 2010 when it comes to people buying and selling small businesses.  Whether you are the Buyer or the Seller, the due diligence process between both parties can be stressful and emotionally draining.  To ensure that everyone involved in the transaction is working from the same baseline of information, we identified 4 critical success factors to keep the process moving smoothly.  

  1. HISTORICAL FINANCIAL STATEMENTS: At least three full years of financial statements should be available along with an interim financial statement and projections for the current year. While it is common to see various owner expenses (add backs) contained in the income statements of small businesses, clean income statements with limited owner expenses increases financial strength (and value).

  2. CONFIDENTIAL BUSINESS REVIEW (CBR): A CBR provides a detailed description of the company being offered for sale, including but not limited to ownership/management, customers, markets and a financial summary that discusses financial trends and performance. A well prepared CBR, while time consuming, will save time in the long run in answering questions from qualified buyers. 

  3. BUSINESS VALUATION: A business valuation is essential in determining the fair market value for a business being listed for sale. A well prepared business valuation will not only help set expectations for the seller but also provide some credibility to the offering from a buyer’s perspective. The valuation should be prepared by a qualified appraiser with a designation in business valuation (i.e. ASA, CBA, CVA, and ABV).  

  4. BUSINESS COMPARABLES: Relying on a set of market comps provides a value benchmark for a company being sold compared to its peers in the marketplace.  NOTE: Remember that comps databases are only as strong as the sources providing that data.  Before subscribing to any comparables databases, make sure that the database provides a consistent set of variables (i.e. see example below) for each transaction and remember that the more sources providing the data the less credible that data becomes.business comps statistics

     

  

SO, WHAT DO YOU THINK OF OUR TOP 4 CRITICAL SUCCESS FACTORS WHEN BUYING OR SELLING A SMALL BUSINESS? 

GIVE US YOUR COMMENTS BELOW AND WE'LL GIVE YOU FREE 24-HOUR ACCESS TO PEERCOMPS, business comparables transactions that you can bank on. 

 

 

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Comments

I agree with your list with the following comments: 
 
HISTORICAL FINANCIAL STATEMENTS: If you can’t obtain prior years and interim financials “step away from the deal”. Of additional importance is to prove/verify, by providing/reviewing income tax returns, that the financials are accurate.  
 
CONFIDENTIAL BUSINESS REVIEW (CBR): The CBR should answer about 80 to 90% of all the questions a buyer might have about the seller’s business. One of the important goals of the business intermediary should be to prepare this comprehensive document – and only the seller can provide the information the intermediary needs to accomplish this task. It may be a “pain in the neck” for the seller to take the time and energy to provide all the required information, but it will pay enormous dividends to the seller – saving gobs of time answering questions from each buyer and generating a large sales price. After a few rounds of emails and/or conference calls, a meeting with the buyer, seller, and intermediaries would be in order. 
 
BUSINESS VALUATION: A business valuation is important, but not necessarily “essential” in determining the fair market value for a business. Most sellers of businesses selling for under $5 million don’t want to pay the $3,000 to $10,000 to obtain a professional appraiser. And a good business intermediary should be able to provide the seller and buyer with compelling documentation of his valuation opinion. And, since most deals under $5 million are financed by an SBA bank, and they require an independently prepared appraisal before committing to the loan over $1million, a seller-obtained appraisal might not be worth the cost. 
 
BUSINESS COMPARABLES: Finding an appropriate comparable “sold business” is often quite challenging – since there aren’t always businesses of similar size, in a similar industry, in a similar geographic area that have been sold in the recent past. And each business is so unique that comparing them, given the limited information you can get, is not nearly as useful as comparing square footage and number of bedrooms in valuing residential real estate
Posted @ Friday, July 29, 2011 12:41 PM by Tom MacPherson
I am a specialist valuer and M&A consultant based in the UK but acting for clients in the HR and recruitment sector in the global market. i have been involved in around 250 deals. 
I find that it is relatively easy to find comparable deals when buying or selling a quoted company, but very much small when the comparables are SME's. The big problem is that headline announcements on deals rarely reflect the true cost of the acquisition. 
For example I sold a 40% share in a recruitment business in the UK for UK£10.6m in 2009. The press releases stated that it was a BIMBO with a transaction value of UK£26.5m. 
what chance do you have of making accurate comparisons when announcements are so misleading? 
 
best wishes 
 
John Bissell
Posted @ Wednesday, August 10, 2011 3:46 AM by John Bissell
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