When contemplating the sale of a business, an important option to consider is seller financing. Many potential buyers don’t have the necessary capital or lender resources to pay cash. Even if they do, they are often reluctant to put such a hefty sum of cash into what, for them, is a new and untried venture.
Why the hesitation? The typical buyer feels that, if the business is really all that it’s “advertised” to be, it should pay for itself. Buyers often interpret the seller’s insistence on all cash as a lack of confidence–in the business, in the buyer’s chances to succeed, or both.
The buyer’s interpretation has some basis in fact. The primary reason sellers shy away from offering terms is their fear that the buyer will be unsuccessful. If the buyer should cease payments–for any reason–the seller would be forced either to take back the business or forfeit the balance of the note.
The seller who operates under the influence of this fear should take a hard look at the upside of seller financing. Statistics show that sellers receive a significantly higher purchase price if they decide to accept terms. On average, a seller who sells for all cash receives approximately 70 percent of the asking price. This adds up to approximately 16 percent difference on a business listed for $150,000, meaning that the seller who is willing to accept terms will receive approximately $24,000 more than the seller who is asking for all cash.
Even with these compelling reasons to accept terms, sellers may still be reluctant. Selling a business can be perceived as a once-in-a-lifetime opportunity to hit the cash jackpot. Therefore, it is important to note that seller financing has advantages that, in many instances, far outweigh the immediate satisfaction of cash-in-hand.
- Seller financing greatly increases the chances that the business will sell.
- The seller offering terms will command a much higher price.
- The interest on a seller-financed deal will add significantly to the actual selling price. (For example, a seller carry-back note at eight percent carried over nine years will double the amount carried. Over a nine-year period, $100,000 at eight percent will result in the seller receiving $200,000.)
- With interest rates currently the lowest in years, sellers can get a much higher rate from a buyer than they can get from any financial institution.
- The tax consequences of accepting terms can be much more advantageous than those of an all-cash sale.
- Financing the sale helps assure the success of both the sale and the business, since the buyer will perceive the offer of terms as a vote of confidence.
Obviously, there are no guarantees that the buyer will be successful in operating the business. However, it is well to note that, in most transactions, buyers are putting a substantial amount of personal cash on the line–in many cases, their entire capital. Although this investment doesn’t insure success, it does mean that the buyer will work hard to support such a commitment.
There are many ways to structure the seller-financed sale that make sense for both buyer and seller. Creative financing is an area where your business broker professional can be of help. He or she can recommend a variety of payment plans that, in many cases, can mean the difference between a successful transaction and one that is not. Serious sellers owe it to themselves to consider financing the sale. By lending a helping hand to buyers, they will, in most cases, be helping themselves as well.
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In the modern age, the market environment is extremely focused on start-ups, which are created and sold by the hour, with certified business valuation being very vital. Where you wish to offer your business, you must know its true value. Where the value is exaggerated, there may be no buyers, and where it is reported as less than actually is, it will be a huge loss. Thus, a certified business valuation is crucial.
It is sometimes difficult to place value upon business as there are important resources that are a part of reaching an appropriate valuation in the future. Such resources, including information resources and licensed innovation, have to be evaluated on purpose. Correct valuations provide an advantage when a transaction is being conducted.
Choosing cost subjectively while viewing the business owners’ impulses will not bring respect or esteem to the business in the sector it is operating in. Business owners are not able to reach a decision regarding the value of a business where a recoup must occur. A buyer will not pay for a business that is not worth its value.
Estimating the value of a business
It is vital to understand that when estimating the value of the business, unimportant information and unimportant estimations are to be avoided in order to achieve a genuine and true estimation to determine the correct value of the business. The worth has to be viewed without uncertainty and passion.
Quality in this regard has to be discovered logically. Businesses with simpler systems and set ups are easier to analyze and estimate. This is in contrast in the case of broad systems and protected innovation. Books of the company as in its records are vital to assessing the value of the firm and where they are not updated and/or tampered with, the valuation may be negative and turn out bad for the business.
It additionally gets to be hard to esteem the business that has numerous proprietors with various interests. The proverb of administration and entrepreneurs additionally impact the valuation.
The significance of the business valuation can’t be focused on enough. In our free enterprise economy, it’s the most vital criteria by which the development of the business will be evaluated. If the benefit and misfortune elements don’t reflect in business sector valuation, then they will have no significance in the business.
Unique methods to estimate the value
The valuation of a business is conducted for reasons of liquidation and also to meet and comply with the rules of the USPAP. Also, firms that are esteemed and with to offer themselves can make use of the esteem of dealers. The actual value can be analyzed through the business valuation, as exhibited above, and has to be done as an experiment while considering costs. A report which may be fair from a master who is ensured will possess value in the sector of business as dealings will occur by using the report as a rule book.
If you’re looking for certified business brokers in Houston, let TruView Business Advisors know.Read More
A common misunderstanding held by businesses, whether old or new, is that they are not able to benefit from the savings in costs coordinated by a customs broker. They feel that they may need to make over $5 Million in revenue in order to receive such benefits and that smaller businesses do not need such a broker.
There are small businesses that apply classification of tariffs seeing it as a customs value and develop contracts that allow for sales to start coming in. Next, a small error in the form of a classification of tariffs may become a bigger problem when larger volumes take over, and there are larger volume transactions taking place across the border.
Where the business is new, it is important to be careful where not using a customs broker. Even though a person may wish to interact with customs authorities directly, it is advised that a customs broker is approached and asked for advice. This is especially true in the initial planning stages of a business to assist in eliminating risks in relation to the business, which is cross-border in nature. If you’re putting your business up for sale in Houston and moving to another country, this blog will prove to be a fascinating read.
How you can add value with a custom broker
- Update customs clearing process
- Make sure that documentation for customs is prepared in an adequate manner
- Figure out the classification of tariffs
- Understand whether your commodity will be allowed
- Making sure that the right duties and taxes are applied to shipments
- Identify whether your commodity is regulated through any other agency or government department
- Understand whether any exemptions apply on the commodity
- Assistance in execution of vendor contracts
In the event a customs broker is not used to conduct business activities as an agent on your behalf, it is vital to understand that during the planning stages, customs brokers can be useful by:
- Insightful advice provided concerning terms
- Origin country sourcing recommendations provided
- Tariff classification and type of entry suggestions and advice given
- Compliance and decision making process assistance
- Providing the best solutions
- Increasing competitive worth
Thus, a customs broker should be consulted with when in the planning stages. This will allow for a variety of benefits to be gained, as have been noted above and will also allow for risk to be identified and mitigated appropriately.
At TruView Business Advisors, we’re constantly offering advisory services. As a major business broker in Houston, we aim to solve problems and engage with a huge number of small, medium, and large businesses. Contact us now to know more!Read More
Owners of small businesses most valuable asset is usually their business. The number one question business owners have when contemplating selling their business is what is their business worth. However, where such individuals wish to know the worth of their business, being able to determine value is a little complicated. The first step is obtaining a TruView Business Broker’s Business Valuation. In certain cases, such as divorce or partnership dispute, there is a need for a certified business valuation to occur.
An asset-based approach
The use of this technique causes the lowest value and is made use of to set up the foundation to be able to place value on a business. Analysts making use of this technique can figure out the actual and fair value of such assets without any liability attached. It may view the assets as parts of the firm that will carry on as an ongoing concern, or it may assume a value of liquidation as if the assets would be sold at a fire sale.
An approach based on income
This technique is dependent upon the income made by the business as the name of the technique dictates. Historical data is adjusted to generate a stream of income, which is hypothetical, which an owner who is a successor would get. This cash flow is discounted to current value subsequently. In order to understand cash flows in the future, historical income is normalized to show only expenses the successors would incur to ensure the firm keeps operating. Items that are non-cash in nature are removed, with the owner’s compensation being used as a normalizing adjustment. The reason for this is because owners can control what they make, and this may reflect or may not reflect rates of the market.
Projections of income of the future in certain situations may be made use of where they are more accurate in mirroring the future performance of the business. This is true, in particular, for start-up businesses.
A market-based technique
Analysts look at new sales of businesses that may be compared within databases reported by brokers within the same sector. Analysts may need to make adjustments to the prices of actual sales to exhibit the differences between valued businesses and sold businesses. This is useful when many businesses may be compared. This method has problems in operating where the business is unusual in nature. Although the certified business valuation of a business can be expensive, it is vital, especially in relation to the future of the client’s finances. It is crucial to seek advice from an experienced professional who possesses insight in such matters to avoid any undue problems in the future.
If you’re looking for certified business brokers in Houston, trust what TruView has to offer. Call us now to know more!Read More
Sellers generally desire all-cash transactions; however, oftentimes partial seller financing is necessary in typical middle market company transactions. Furthermore, sellers who demand all-cash deals typically receive a lower purchase price than they would have if the deal were structured differently.
Although buyers may be able to pay all-cash at closing, they often want to structure a deal where the seller has left some portion of the price on the table, either in the form of a note or an earnout. Deferring some of the owner’s remuneration from the transaction will provide leverage in the event that the owner has misrepresented the business. An earnout is a mechanism to provide payment based on future performance. Acquirers like to suggest that, if the business is as it is represented, there should be no problem with this type of payout. The owner’s retort is that he or she knows the business is sound under his or her management but does not know whether the buyer will be as successful in operating the business.
Moreover, the owner has taken the business risk while owning the business; why would he or she continue to be at risk with someone else at the helm? Nevertheless, there are circumstances in which an earnout can be quite useful in recognizing full value and consummating a transaction. For example, suppose that a company had spent three years and vast sums developing a new product and had just launched the product at the time of a sale. A certain value could be arrived at for the current business, and an earnout could be structured to compensate the owner for the effort and expense of developing the new product if and when the sales of the new product materialize. Under this scenario, everyone wins.
The terms of the deal are extremely important to both parties involved in the transaction. Many times the buyers and sellers, and their advisors, are in agreement with all the terms of the transaction, except for the price. Although the variance on price may seem to be a “deal killer,” the price gap can often be resolved so that both parties can move forward to complete the transaction.
Listed below are some suggestions on how to bridge the price gap:
- If the real estate was originally included in the deal, the seller may choose to rent the premise to the acquirer rather than sell it outright. This will decrease the price of the transaction by the value of the real estate. The buyer might also choose to pay higher rent in order to decrease the “goodwill” portion of the sale. The seller may choose to retain the title to certain machinery and equipment and lease it back to the buyer.
- The purchaser can acquire less than 100% of the company initially and have the option to buy the remaining interest in the future. For example, a buyer could purchase 70% of the seller’s stock with an option to acquire an additional 10% a year for three years based on a predetermined formula. The seller will enjoy 30% of the profits plus a multiple of the earnings at the end of the period. The buyer will be able to complete the transaction in a two-step process, making the purchase easier to accomplish. The seller may also have a “put” which will force the buyer to purchase the remaining 30% at some future date.
- A subsidiary can be created for the fastest growing portion of the business being acquired. The buyer and seller can then share 50/50 in the part of the business that was “spun-off” until the original transaction is paid off.
- A royalty can be structured based on revenue, gross margins, EBIT, or EBITDA. This is usually easier to structure than an earnout.
- Certain assets, such as automobiles or non-business-related real estate, can be carved out of the sale to reduce the actual purchase price.
Although the above suggestions will not solve all of the pricing gap problems, they may lead the participants in the necessary direction to resolve them. The ability to structure successful transactions that satisfy both buyer and seller requires an immense amount of time, skill, experience, and most of all – imagination.
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