The marketing package your broker creates is the first interaction a prospective buyer will have with your business and is the prime validation of the old adage, “You can only make a first impression once.”
The marketing package will include financials and information about employees, assets and how the business operates, but a prospective buyer will make a decision to purchase a business based on the future upside potential for him or her.
In other words, he is worried about the amount of money he, as a new owner, will be able to take out of the business annually. He’s looking at the whole package thinking, “How will owning this business improve my life? What’s it worth to me?”
You and your business broker will establish a price for the business based on past and current performance and you’ll have the performance well documented in company financial reports.
Various formulas and ratios will be used to determine net worth for different types of businesses but in the final analysis, there is one determinant of business worth: The amount a willing and educated buyer is willing to pay so you can sell your business.
You can only make a first impression once
The cash flow part of the marketing package that buyer first sees is probably going to determine his first impression.
Most cash flow is fairly easy to quantify and the following components: net income, owner salary, depreciation/amortization, interest and one-time or recurring expenses are the basics. The company financials and tax returns will substantiate and document the cash flow.
But one of the benefits of owning a small business is the owner perks, or the ability to have a business pay for certain personal expenses. Technically, none of these costs could be transferred to a new owner, but if you have a good paper trail, a buyer may enthusiastically consider them in his analysis of sale price—and what the business is worth to him.
The most common owner perks acceptable to a prospective buyer are:
- Car Payment: Spouse and children’s car payment
- Car insurance: Spouse and children’s car insurance
- Health Insurance: Spouse and children’s health insurance
- Life Insurance: Spouse’s life insurance
- 401(k) contributions: charitable contributions
- IRA: Meals and entertainment
- Travel and Entertainment
These kinds of additions can change a good first impression into a great one and help a potential owner see multiple ways your business can improve his life.
(A word of caution: if a business is being sold with mostly owner financing, all of the verifiable owner perks can be used. If the business will be financed through SBA or a conventional bank, financial institutions vary on what they will accept as legitimate CASH FLOW. A lending institution considers primarily adjusted EBITDA (Earnings before Interest, Depreciation, and Amortization) plus owner’s salary, when they calculate their debt coverage analysis to determine if they will fund.)