Author: Sasa

The BBF has given sellers and their brokers an amazing marketplace to sell businesses. It has proved to be quite efficient in its ability to find the right buyer to buy businesses that enter the marketplace. And in today’s seller-favored landscape of business transactions, if a business is not selling, we can only deduce that it is overpriced. This issue is obvious, and the statistics show clearly that these businesses most likely will not sell. In this article, we will delve into some key reasons as to why overpriced businesses struggle to sell.

Educated Buyers: Modern consumers are more informed than ever before, thanks to the wealth of information available at their fingertips. Buyers conduct thorough research, understanding market trends, financial standings, and comparable sales. An overpriced business stands out like a sore thumb to educated buyers who can quickly identify discrepancies between the asking price and the actual value. Informed buyers are less likely to “make an offer,” leading to a prolonged listing period or, in some cases, no sale at all.

Comparative Shopping on the Internet: The internet has revolutionized the way people shop, and this holds true for business acquisitions as well. Potential buyers can effortlessly compare prices, features, and the overall value of businesses in the same industry or niche. A business that is perceived as overpriced online will struggle to attract serious inquiries, as buyers can easily find alternatives with better value propositions. The transparency provided by the internet has made it imperative for sellers to understand the marketplace and price accordingly.

Aversion to Negotiation: Negotiating the sale of a business can be a delicate dance, and some buyers are averse to the process altogether. When a business is overpriced, negotiations become more challenging, and potential buyers may be discouraged from engaging in the conversation. Buyers prefer transparent and fair pricing. Therefore, an overpriced business may create an atmosphere of distrust, hindering the negotiation process and causing the process to never even start. This may also be a generational trend worth consideration.

Fear of Offending Sellers: Buyers often tread carefully during the negotiation process, fearing that expressing concerns about the pricing may offend the sellers. This reluctance to discuss perceived overpricing can lead to a breakdown in communication and a failure to reach a mutually agreeable deal. Sellers who are open to constructive feedback and are willing to adjust their pricing strategy are more likely to engage in successful negotiations and ultimately close the deal.

Perception of Unreasonableness: The perception of a seller as being unreasonable or even delusional can stem from an overpriced listing. If a business is priced significantly higher than its market value, potential buyers may view the seller as unrealistic or out of touch with market realities. This perception can drive away serious buyers who are looking for fair and justifiable pricing. It may also call into question the seller’s representations of other items in the opportunity such as earnings claims.

Drop in Sales: The Evidence is Clear: Statistics indicate a clear correlation between overpricing and a failure to sell. When a business is priced more than 15% above its market value, the chances of a successful sale decrease significantly. This underscores the importance of accurately valuing a business, pricing it appropriately to attract potential buyers and facilitating a successful transaction process.

In conclusion, the primary reason businesses fail to sell is that they are overpriced. Educated buyers, the power of the internet, aversion to negotiation, fear of offending sellers, and the perception of unreasonableness are all factors that contribute to this dilemma. Again, buyers will not “just make an offer.” Brokers must help their sellers carefully consider market dynamics, give them professional advice, so they adopt a realistic pricing strategy in order to maximize their chances of a successful business sale in today’s marketplace. Simply stated, if you are trying to sell a business, and have yet to, your business is most likely overpriced.

I am honored to lead the Business Brokers of Florida this year. I am fortunate to have a large group of dedicated volunteer leaders, a strong assembly of members and affiliates, and a great management team to help our Association be the best in our profession.

I would like everyone to mark their calendars for our upcoming BBF Conference, August 23-25 at the Caribe Royale in Orlando Florida. Some fantastic education sessions are in the plans and a fantastic opportunity to network with other Business Brokers. I find at these events, I sometimes learn as much from other Brokers while networking as in our workshops. Both are reasons to make sure you are there. Sign up will be coming soon, sign up early to participate in the maximum discount from registration.

Lots of improvements are being made to our public facing website with search capabilities for our members and affiliates. We are working to give you more exposure to the public. There is contact information on each office as well as each member. A link to your website is included which will help the SEO on your website.

We will be ordering awards soon to recognize those members that achieved different levels during 2023. Please make sure all your SOLDs are up to date in our BLS system.

There is lots going on in BBF and many committees that need volunteers from our membership to help move BBF to the next level. Please contact me if you are willing to serve. I would like to thank all those members that do serve, we all appreciate all you do for BBF.

Our duty as Brokers is to showcase our business listings with as much detail and accuracy as possible so as to wow the Buyer. One way to do that is through the preparation of a Confidential Business Review (CBR) or a Confidential Information Memorandum (CIM). These two terms are often intertwined and used in the same manner. The difference between these two documents is that the CIM is usually prepared by Investment Bankers and M&A Advisors for Mid-Market and Medium Size Business offerings. CBRs and CIMs reflect the heart and soul of the business. They are time consuming and can only be put together once all the relevant information on the particular business has been obtained by the broker, including research on the industry and the market where it operates.

What’s the purpose of a Confidential Information Memorandum?

A Confidential Information Memorandum (CIM) is a professionally prepared lengthy summary of your business that is presented to prescreened buyers who are interested in purchasing your business. The CIM addresses the buyer’s questions quickly and efficiently, saving countless hours. It includes information regarding company history, products, services, licensing, and competition. It also includes a financial summary, information about operations, lease terms, the value of assets and inventory, an employee summary, and terms of the sale. The purpose of the CIM is to help the buyer decide if they would like to take the next steps and learn more about the business. The CIM will not address every question the buyer may have about the business. Rather, it allows the buyer to take the next steps in the transaction.

What is included in the CBR (20-40 pages)?

Here are the major topics typically covered:

What’s included in a CIM (50-150 pages)?

In addition to the above, it may include these additional topics:

As you may have noticed this is an extensive and comprehensive portrait of the business that requires accurate and detailed research and analysis of all information gathered from Seller and online. These documents answer most questions Buyers will have. They are one of the most important marketing tools we have to showcase our listings. But you don’t always need to have such an extensive portrayal of a business if it’s not that sophisticated. Smaller valued businesses can also be showcased using a Confidential Summary Booklet (5-10 pages) or a 2-3 page flyer/brochure. Regardless of what type of Memorandum or Flyer you decide to use, make sure it’s colorful, insightful, with graphs, tables and valuable content, in other words “eye candy”. Sometimes less is more in order to trigger the Buyer’s interest and curiosity. Therefore, make it a habit to impress both Buyers and Sellers with your professionalism, expertise, value and effort you place in the marketing of your listings. CIMs can cost anywhere from $500 to $2500 to have it done professionally, if you do not possess the skill.

If you’d like to see samples of CIMS or CBRs feel free to email me at mhabib@theroyalcrowngroup.com so I can share some of them with you.

What is working capital? Working capital represents the short-term liquidity and financial health of a business. Positive working capital can indicate the business is well-managed and financially stable. Working capital is the money available to meet current, short-term obligations. It is calculated by subtracting short-term liabilities from short-term assets. Short liabilities include accounts payable, salaries, taxes, and other debts/accrued expenses. Short-term assets include cash, accounts receivable, and inventory that will be converted into cash within twelve months.

Oftentimes, sellers are taken by surprise when a buyer demands a specific amount of working capital to be included in the sale price of a business. In lower-middle-market valuations based off EBITDA multiples, working capital is included in the price. In main street business valuations based off SDE multiples, working capital is not included in the price. However, with a stumbling economy, more sophisticated lower-middle-market buyers are reaching down into main street businesses and applying their expectations to main street acquisitions. So, why would a buyer want to include working capital in the acquisition?

Here are seven reasons why a buyer may expect working capital to be included:

1. Ensures Business Continuity

Working capital is essential for the day-to-day operations of a business. By including working capital in the sale price, the buyer ensures the business will have sufficient funds to continue its operations smoothly after the acquisition.

2. Creates Seamless Transition

Working capital helps create a smooth transitional period during which the buyer takes over the operations. By including working capital in the sale price, the buyer has immediate access to funds to cover initial expenses, pay suppliers and employees, handle any unexpected costs, etc. during the transition.

3. Avoids Additional Investments

Working capital avoids the need for the buyer to inject additional capital just to maintain the current operations of the business. By including working capital in the sale price, the buyer can avoid having to make an additional investment immediately after the acquisition.

4. Mitigates Risk

Working capital can indicate the business is well-managed and financially stable. By including working capital in the sale price, the buyer reduces the risk of acquiring a business that may be struggling to meet its short-term obligations.

5. Simplifies Negotiations

Working capital simplifies the negotiation process. By including working capital in the sale price, instead of negotiating a separate amount for working capital, both parties agree on a total purchase price that includes the estimated working capital needed to operate the business.

6. Avoids Disputes

Working capital can be a contentious issue in negotiations if not explicitly addressed. By including working capital in the sale price, both parties avoid potential disputes or disagreements over the specific amount of working capital at the time of the sale.

7. Simplifies Handing of A/R and A/P

Working capital simplifies the handling of accounts receivable (A/R) and accounts payable(A/P) after the sale. By including working capital in the sale price, A/R and A/P do not need to be allocated between the buyer and seller. The buyer can simply receive revenue and pay bills as if the sale never occurred.

It is important to note the inclusion of working capital in the sale price should be clearly defined in the purchase agreement. Both parties should agree on the methodology for calculating the working capital amount, any adjustments, and the target working capital amount at the time of the sale. Proper due diligence is crucial to ensure the working capital included in the sale price accurately reflects the needs of the business and is fair to both parties.

Sources: Bank of America and Chat GPT

Using “multiples” to value a business may be a disservice to both the seller and buyer. “Multiples” may not represent the real value of the business.

Multiples are generally median or average values published in the BBF MLS or in Pratt Stats/Deal Stats. However, these are just convenient “midpoints” that do not represent any specific transaction. These multiples are based on historical information, a different market area, a different economic environment, a different seller’s perspective, etc. Unless the transaction being “valued” is truly an average transaction, then using these multiples is misleading.

These multiples are applied to recent historical financial performance of the business (transaction being contemplated).

What is the “real” value of a business? Standard concepts/definitions used credentialed valuation specialists to value a business are:

Future economic benefits are important relevant facts in valuing a transaction and are based on:

A Real-Life Example:

This was a rapidly growing business in a mature industry but in a growing market. The following graphs show historical performance and statistically projected growth.

This business should have been “valued”, given knowledge of all the relevant facts, based on future economic benefits. Even though the industry was mature the market area was growing in both population and economic prosperity and the business was growing due to identification of a niche in the market, good management and “sweat equity”. This resulted in increasing transactions, stable to slightly increasing revenue per transaction and increasing gross revenue. Bottom-line was increasing also due to reduction in early year start-up costs. There were substantial future economic benefits in the business.

Nonetheless, the buyer wanted to focus on multiples of historical performance. Why?