While the answer to this goodwill question is a resounding “yes”, one of the most perplexing questions a small business owner faces when he or she decides to sell their business is "what do I have to sell and what is it worth?" And if yours is a business services company with little equipment, inventory or fixed assets, this question will resonate even more.
Most owners are familiar with balance sheet assets such as:
• Cash and short term investments
• Accounts receivable
• Inventory
• Equipment and machinery
• Business real estate
But other valuable business assets may not appear on the company's balance sheet. Among them are such intangible assets as intellectual property…and business goodwill.
Then how do you value and monetize an asset that is not tangible, yet does contribute to income?
How do you monetize a sales process, know-how, customer lists, vendor agreements, training systems, technical process, distribution networks, and client relationships? How do you monetize your position in the marketplace and your ability to effectively serve your customers and drive additional income? And how do you monetize all of those proprietary methods and processes you use in order to conduct your business?
The answer is to properly value your business “goodwill”.
Owners may believe that the business has additional value simply because it is able to create new products and services, attract new customers, and acquire or merge with other businesses.
But to properly value and provide a rationale for a valuation which includes business goodwill, two most common valuation methods are the Capitalized Excess Earnings method and the Discounted Cash Flow method.
The Capitalized Excess Earnings method works as follows:
Estimate the fair market value of all identified business assets.
Determine a fair rate of return on these assets.
Subtract the return from the total business earnings. The difference is the excess earnings.
Capitalize the excess earnings to determine business goodwill.
Of course this is often more art than science when the correct choice of the capitalization rate is key and will determine the resulting value.
The Discounted Cash Flow business valuation method utilizes a time value of money concept which expresses a business market value as the present day value of future expected cash flows. Business goodwill is then estimated as the difference between the total business value and the fair market value of all identified and fixed business assets.
And remember, an evaluation of goodwill is called for not only when selling your company, but also when two businesses merge. This is when equity ownership needs to be allocated among the business owners. One way to do this is to allocate a portion of the assets being contributed as business goodwill.
And when seeking credit or a bank loan, the value of your business assets includes business goodwill and always will influence the lender’s decision.
Ken Stein, CFP®
Business Broker and Intermediary
www.linkedin.com/in/kennethsteincfp
www.gotoimpact.com www.reliancestrategies.com
.
Monday, February 22, 2010
Friday, January 15, 2010
It's a Living Asset!
Well, the monster in the attic is not from some old horror movie-it’s your business!
While many business brokers and tax advisors think of your business as the sum total of your “Available Free Cash Flow”, you know it is very much more than that! Your closely held business is a living asset. It often sums up what you do most every day and how you do it.
It’s about your plans for your family, your key people, your vendor relationships and agreements, your sales process and your back office. And of course, it’s about your clients and everything you do for them. The over-the-top service you provide. The value-adds you cannot quantify as a line item on your Income and Expense Statement. It’s what makes your clients raving fans.
Your business is a Living Asset! Some call this “Goodwill”-and it is. Some call this Intellectual Property”. And it is.
So when you want to sell your business, why discount it at the market price of your fixed assets, inventory and equipment? Since you can amortize goodwill, this living asset, your business, clearly has excess value.
And how do you maximize this value and sell for the highest price? You will have to address the following points:
What is your business worth? If you price your business too high, you'll scare away buyers. If you price it too low, you'll lose out. A valuation must blend the hard facts, the financials, with the qualitative components of your enterprise: goodwill, your client relationships, reputation, and trademarks.
What about the taxman? Taxes can take a huge bite out of the money you receive for your business. In order to structure a sale, it pays to know just how big that tax bite will be. And then try to lower it, most likely with help from a CFP® or other advisor.
Looking your best. The getting-ready process includes not only sprucing up your premises, but getting your numbers and systems in good shape. Your systems, policies and procedures might even be described in a manual, a sort of “Users Guide’ for a prospective purchaser.
Seek Potential Buyers. Know what type of transaction structure will be suitable, and where and how your buyer might be financed. This is where a good business broker can market and promote your business to a broad network. And, remember that while confidentiality is of upmost importance, so too is qualifying a purchaser. Your broker should evaluate a potential buyer to determine whether he has the necessary background, skills and financial clout to bring an offer to close.
Ken Stein, CFP®
Business Broker and Intermediary
www.linkedin.com/in/kennethsteincfp
www.gotoimpact.com
While many business brokers and tax advisors think of your business as the sum total of your “Available Free Cash Flow”, you know it is very much more than that! Your closely held business is a living asset. It often sums up what you do most every day and how you do it.
It’s about your plans for your family, your key people, your vendor relationships and agreements, your sales process and your back office. And of course, it’s about your clients and everything you do for them. The over-the-top service you provide. The value-adds you cannot quantify as a line item on your Income and Expense Statement. It’s what makes your clients raving fans.
Your business is a Living Asset! Some call this “Goodwill”-and it is. Some call this Intellectual Property”. And it is.
So when you want to sell your business, why discount it at the market price of your fixed assets, inventory and equipment? Since you can amortize goodwill, this living asset, your business, clearly has excess value.
And how do you maximize this value and sell for the highest price? You will have to address the following points:
What is your business worth? If you price your business too high, you'll scare away buyers. If you price it too low, you'll lose out. A valuation must blend the hard facts, the financials, with the qualitative components of your enterprise: goodwill, your client relationships, reputation, and trademarks.
What about the taxman? Taxes can take a huge bite out of the money you receive for your business. In order to structure a sale, it pays to know just how big that tax bite will be. And then try to lower it, most likely with help from a CFP® or other advisor.
Looking your best. The getting-ready process includes not only sprucing up your premises, but getting your numbers and systems in good shape. Your systems, policies and procedures might even be described in a manual, a sort of “Users Guide’ for a prospective purchaser.
Seek Potential Buyers. Know what type of transaction structure will be suitable, and where and how your buyer might be financed. This is where a good business broker can market and promote your business to a broad network. And, remember that while confidentiality is of upmost importance, so too is qualifying a purchaser. Your broker should evaluate a potential buyer to determine whether he has the necessary background, skills and financial clout to bring an offer to close.
Ken Stein, CFP®
Business Broker and Intermediary
www.linkedin.com/in/kennethsteincfp
www.gotoimpact.com
Baby Boomer Bust-up! The time is now!
Some BBBO’s (Baby Boomer Business Owners) are ready to quit, or should I say sell?
Tired of the grind? Ready for something new or for retirement? Dreaming of receiving a lucrative lump sum, or of that lake house you have always wanted? It may be time to sell! Are you ready?
A new study of privately held businesses concludes that as baby boomer entrepreneurs retire, they will transfer about $3.3 trillion worth of wealth as these businesses are left to heirs or sold.
Most business owners wait until retirement to sell, and as baby boomers are getting older, the number of businesses for sale is rising. In fact, most business owners identify their age as the main motivation for considering a sale.
The secret to selling your business for the highest possible price is simple. Selling may be the easy part! First, start with the end in mind: it’s what to do with the next chapter of your life that you need to figure out!
Do you want to work and stay on as a paid consultant, but without the headaches? Do you prefer to travel like you always planned? What about that local charity that needs your support or time? Or that community group you wished to start? And your new grandchild who is just too cute and needs more playtime with you! And speaking of grandchildren and family, in 2010 you must take time to review your estate plan due to changes in this area.
To capitalize on your sale, follow these basic guidelines:
1. Always maximize the value of goodwill and other intangibles
2. Know where to promote and market your company
3. Evaluate how to minimize taxes due and coordinate your sale with your overall plans
So for all you BBBO’s out there-The time is now. Bust It Up and get your business ready for sale!
Ken Stein, CFP®
Business Broker and Intermediary
www.linkedin.com/in/kennethsteincfp
www.gotoimpact.com
Tired of the grind? Ready for something new or for retirement? Dreaming of receiving a lucrative lump sum, or of that lake house you have always wanted? It may be time to sell! Are you ready?
A new study of privately held businesses concludes that as baby boomer entrepreneurs retire, they will transfer about $3.3 trillion worth of wealth as these businesses are left to heirs or sold.
Most business owners wait until retirement to sell, and as baby boomers are getting older, the number of businesses for sale is rising. In fact, most business owners identify their age as the main motivation for considering a sale.
The secret to selling your business for the highest possible price is simple. Selling may be the easy part! First, start with the end in mind: it’s what to do with the next chapter of your life that you need to figure out!
Do you want to work and stay on as a paid consultant, but without the headaches? Do you prefer to travel like you always planned? What about that local charity that needs your support or time? Or that community group you wished to start? And your new grandchild who is just too cute and needs more playtime with you! And speaking of grandchildren and family, in 2010 you must take time to review your estate plan due to changes in this area.
To capitalize on your sale, follow these basic guidelines:
1. Always maximize the value of goodwill and other intangibles
2. Know where to promote and market your company
3. Evaluate how to minimize taxes due and coordinate your sale with your overall plans
So for all you BBBO’s out there-The time is now. Bust It Up and get your business ready for sale!
Ken Stein, CFP®
Business Broker and Intermediary
www.linkedin.com/in/kennethsteincfp
www.gotoimpact.com
What is Your Business Worth?
For too many business owners, this is a nagging question-they just don’t know!
A business valuation is a tool to better manage your future growth, to analyze trends, to help raise capital, and to value for estate and retirement planning. And of course, when you wish to sell, your valuation will determine the correct asking price.
While there are many “rules of thumb” to value, a business is ultimately worth whatever a willing buyer is ready to pay and what you, the seller, are willing to accept. It is very much like an auction, bid/ask, until both sides agree.
A good valuation will balance financials and marketability, hard facts and soft facts, fixed assets and goodwill. It will provide a rationale for both buyer and seller to move forward.
Hard facts flow from the income and expense statement, from an appraisal of inventory and equipment and real estate. Soft facts are everything else: goodwill and trademarks, company history, competitive advantage, customer dispersion, vendor and client relationships, and perceived glamour and lifestyle qualities.
Every business for sale should have transferrable tools and systems, policies and procedures. A sort of “User’s Guide” for the purchaser. Will the seller stay on to mentor and transition the new purchaser to clients? What will the financing structure look like and what will the tax consequences be?
Ask yourself: Do you know what your business is worth? Have you had a business valuation in the past 18 months? Do you have systems in place? Do you know how to effectively market your business? Do you have an exit strategy?
It may be time to think of selling as a preferred exit strategy. So put first things first and learn how to value your company today!
Ken Stein, CFP®
Business Broker and Intermediary
www.linkedin.com/in/kennethsteincfp
www.gotoimpact.com
A business valuation is a tool to better manage your future growth, to analyze trends, to help raise capital, and to value for estate and retirement planning. And of course, when you wish to sell, your valuation will determine the correct asking price.
While there are many “rules of thumb” to value, a business is ultimately worth whatever a willing buyer is ready to pay and what you, the seller, are willing to accept. It is very much like an auction, bid/ask, until both sides agree.
A good valuation will balance financials and marketability, hard facts and soft facts, fixed assets and goodwill. It will provide a rationale for both buyer and seller to move forward.
Hard facts flow from the income and expense statement, from an appraisal of inventory and equipment and real estate. Soft facts are everything else: goodwill and trademarks, company history, competitive advantage, customer dispersion, vendor and client relationships, and perceived glamour and lifestyle qualities.
Every business for sale should have transferrable tools and systems, policies and procedures. A sort of “User’s Guide” for the purchaser. Will the seller stay on to mentor and transition the new purchaser to clients? What will the financing structure look like and what will the tax consequences be?
Ask yourself: Do you know what your business is worth? Have you had a business valuation in the past 18 months? Do you have systems in place? Do you know how to effectively market your business? Do you have an exit strategy?
It may be time to think of selling as a preferred exit strategy. So put first things first and learn how to value your company today!
Ken Stein, CFP®
Business Broker and Intermediary
www.linkedin.com/in/kennethsteincfp
www.gotoimpact.com
Subscribe to:
Posts (Atom)