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Weighing up the offers There are many ways of paying for and taking over a business. You will need to weigh up what is on offer. Can the buyer really pay for

Advantages of Using A Business Broker

As a business broker, you’re an expert in doing what you do.  But how good are you in doing things that you’ve never done before?  If you’ve never sold a business, then it could make sense to rely on an expert for assistance.  Here are some advantages of using a business broker to sell your business:

• Access to qualified buyers. Finding potential buyers is easy. You can place an ad in the local paper or online, and in 24 hours you’ll have plenty of interest. The hard part is qualifying a buyer. Any broker worth their salt will have access to a pool of potential qualified buyers. These are buyers that have a history of reputable buying. They also screen unqualified buyers.
• Can help you keep your sale confidential. Customers, vendors, and employees panic when they hear about a sale, and rightly so. As a third party, part of the broker’s job is to keep your sale anonymous, and out of the public space. They are contractually obligated to keep the sale secret so the business continues to run smoothly.
• Can free you to focus on your business while they sell. As a business owner, you’re busy. Running a business is more than a full-time job. A broker’s full-time job is to facilitate the buying and selling of businesses. They can free you to run your business while they focus on the sale.
• Knowledge of how to value a business and how to negotiate a good price. Experienced brokers have a portfolio of successful sales. They understand how to properly evaluate the strengths and weaknesses of a business, and how to do a proper valuation. As an intermediary, a broker should be an expert at negotiating a fair deal. If you’re meeting with a broker, ask in detail about past deals.
• Access to financing for buyers. Good brokers have connections with investors, banks, and are able to track down other sources of funding for a buyer. The right buyer with proper financing means a better sale.

Business valuations using EBITDA (Earnings Before Interest, Tax, Depreciation & Amortisation) is a widely used profit related valuation method.

When EBITDA is employed in valuing a business, it needs to be “adjusted” which should include any “add-backs” as part of the “normalising adjustments” which will typically take into account of items such as:

• Below fair market rates for sales, purchases or expenses
• Owners salary or bonuses that are not at a fair market rate
• Repairs and maintenance charges that should have been capitalised (eg improvements)
• Non-recurring expenditure, including but not limited to professional and legal fees, patent & trademark fees, donations, employee bonuses etc
• Stock levels that are too high for one reason or another

EBITDA Multiples

A multiple is then applied to the “Adjusted EBITDA” figure, which will determine the Valuation for the business (or amount of Return) if the shares are then sold.  The EBITDA multiple in the valuation process is often based on an industry based average, calculated on a sample of transactional values and multiples of similar sized businesses sold. The multiplier figure for SME company valuations, is usually between 3 and 5, sometimes higher eg 7 or 8 or higher still when a “special purchaser” is involved in buying the business, ie a purchase for strategic reasons; the actual multiplier taking into account risk factors, business environment, market potential etc.

Risk Factors that affect Value

We all know that “the higher risk, the greater the return” but when it comes to business value, those risk areas need to be reflected the other way around as generally, “the lower the risk, the higher the value” and therefore, the Valuer will take into account the “risk factors” which will determine the multiplier, such as:

• Good second-tier management team in place
• Not reliant on the business owner(s)
• Blue-chip customer base
• No one customer responsible for 10% or more of turnover
• Repeat business
• Contracts with Suppliers & Customers
• Niche, growing market(s)
• Difficult to replicate
• Minimal competition
• Good reputation within the market place
• Steady year on year growth
• Accreditations & Management Systems

When evaluating the value of a business, it is important to understand what “adjustments” have been made (or not been made) and what multiplier has been used. These must be seen to be fair and reasonable, otherwise a false impression of value could easily be made.

For further information on EBITDA Valuations, please CLICK HERE.

Business Valuation Service

To obtain an independently prepared, professional business valuation letter or report, simply complete the form below – we will also send you a sample valuation letter & report.

“I was very impressed with the quality, a well drafted report brought together in such a short period of time. Thank you very much for the excellent help when needed most.”  EO

“We required a valuation for an EMI share scheme and were provided a number of options which included HMRC approval.  I’d recommend Stirling for their competitive, efficient and hassle free valuation service.” Shelley Wood Co-Founder, Director Gemba Advantage Ltd. 

“Thank you for your service! I’m happy to say the report was provided fast with all the details mentioned, all the appropriate questions been asked. We will be pleased to work with you in future!”  Oksana Eftimiadi, Finance Netcracker Technology

Achieving a Rapport with Clients

Phil Perchard discusses the steps that business brokers should take to maximize their odds of success. One of his points on building success centers on establishing a good rapport with clients. In order to achieve this, it is important to keep in mind that the first meeting is of paramount important. As he points out, trust isn't established until it is felt by both parties