FAQs

In order to gauge a business broker’s track record, ask how many companies he or she has sold in the past year. Additionally, inquire how many other listings they currently have in order to determine if they’ll have adequate time to dedicate to your business.

Determining the market value of your business entails some research and analysis. It doesn’t hurt to have recent experience selling Florida businesses and current market data.

It starts by adding up the value of everything the business owns, including all assets including inventory, land, machinery, equipment, etc.  Subtract any debts or liabilities. The value of the business’s balance sheet is at least a starting point for determining the business’s worth.

There are a number of documents that you should prepare, both before you pursue a sale and once you start working with a business broker. Your first step is to get a formal business appraisal of your company so that you have an idea of its value, says Stan Crow, of S. Crow Collateral in Boise, Idaho. Your appraiser will need a couple of documents:
* An adjusted balance sheet &
* A “statement of seller’s discretionary income.”

“Prepare a spreadsheet that shows the numbers from the business’ last three years’ tax returns, with adjustments to add back your salary, depreciation deductions, contributions, interest expense, interest income, and any other items of income or expense that are not integral to the business,” he said. This document will show your discretionary income for each of the last three years. The adjusted balance sheet that you prepare (or ask your accountant to prepare for you) will adjust your company’s assets to fair market value and eliminate assets and liabilities that a buyer will not acquire, such as cash and leased equipment.

Once you have those documents prepared, hire an experienced business appraiser to give you a professional opinion of your company’s market value. This number will lend credibility to your sales price should you decide to pursue a sale of your business.

This is a great question and I truly admire your thought process in potentially offering more to get the terms you need – excellent strategy.

The first step, is to determine that the seller has truly priced it accordingly for an all-cash deal.

While there are no hard rules, generally speaking. an all-cash deal will usually translate into a 15-25% discount off the asking price when seller financing is being offered. As such, if your 2.5 multiple is correct, this would mean a $250,000 price. As such, he hasn’t priced it accordingly at all. Unless there are extenuating circumstances that you have not revealed, you should look to pay around $200,000 for an all-cash transaction.

Insofar as seller financing is concerned, you are correct: the vast majority of small business acquisitions involve seller financing. In fact, it’s estimated that over 80% include some form of financial aid from the former owner. While the percentages vary, it’s generally 30% to 50% of the total purchase price. When you think about the situation, it makes perfect sense. First of all, by providing financing, the seller validates the viability of the business itself. Also, the seller is able to get the highest price possible by funding part of the acquisition.

From a buyer’s perspective, it serves to reinforce that the seller is also at risk in the transaction. It’s a perfect mechanism to help ensure that what you’ve been told by the seller is true and accurate. It also serves as a mechanism to deal with situations that may arise later on that come about as a result of their actions where you may need the ability to offset their financing.

The seller NEEDS to realize that this is a common deal structure. Further, if he or she is not prepared to do so then they will either have to wait for a very specific buyer, the business may not sell, or, they have to understand the discount inherent with these type of deals. They can’t have it both ways. If they want all cash, the price must reflect it.

• While the terms vary for seller financing, you can expect to pay about 8% over four to five years. Plus, you can get far more creative with seller financing than any other.
• Negotiate a holiday from any payments for three-six months after closing.
• Allow for the first year to be all principal.
• Have the right to make lump-sum payments several times a year towards the principal.
• No prepayment penalty.
• You can arrange for lower payments throughout the loan with a balloon payment down the road.
• While you will have to sign personally, you will not have to personally collateralize the loan. The seller’s lien is against the assets of the business.

This is a perfect example of why a seller should engage a competent business broker to assist them with the sale of their business! A broker would provide him with the education needed to effectively market the business. Since that is not the case, it’s up to you, although you should realize that you may not be able to convince him that he is simply asking too much.


If this seller is not motivated to sell the business, then it really doesn’t matter what you say or do, there’s no deal here.


Has the seller identified how he actually established the price? Did he have a professional appraisal done or has he simply priced it based on what he thinks it is worth or what he wants to get from the sale? Chances are it’s a shot in the dark valuation and so the first step is to understand his logic and possibly suggest a professional valuation by a Certified Business Appraiser. It’s possible that the seller may not want to have an appraisal done, so you should provide him with some industry statistics of comparable businesses that were sold so he begins to understand the marketplace.


You should also have your CPA compile a valuation based upon the financials presented to you at a multiple that is in line with the industry and what you feel the business is worth.


If you truly believe that he wants to sell the business, then he will have to demonstrate some flexibility on the price and/or terms. I would recommend that you compile your data and present it to him. Then, you may even want to present an offer to him at your valuation. If the seller does not counter your offer, or show any flexibility whatsoever, then move on to the next deal because it will then be abundantly clear that he does not have the level of motivation needed to sell his business.

The first thing to understand is that non-compete clauses are very negotiable. Give the seller and broker the benefit of the doubt initially because the listing sheet terms for this part of the deal probably weren’t given much thought. Notwithstanding this, I agree with you completely that the 3o-mile/3 year offer is ridiculous and VERY suspicious. Before getting concerned, ask the broker about this. If he says anything other that it being “negotiable” or “flexible”, you will want to address this with the seller.

The terms of the non-compete agreement should be such that they offer you full proof comfort and protection that the seller will not go back into business. But, the terms must also be reasonable if this is ever challenged or breached. if the distributor does business in Texas only, then the non-compete should be state-wide. While you can try to negotiate a bigger region, chances are it will not hold up in court and may be adjusted.

Regarding the number of years, I believe that a five- to seven-year period is the least that should be negotiated.

Any seller who is really sincere about retirement, and genuinely wants you to be successful, will agree to non-compete terms that makes you comfortable. In my experience, any seller who turns the non-compete into a “deal breaker” is someone who clearly has a hidden agenda and most often is not to be trusted.

Present two offers: The first offer is based upon the hard data of what the business is like today and a second whereby you’ll pay more based upon the value of the new business in the form of an earn out. However, the “premium” has to be weighed against who will do the work to secure the business. If the seller will remain active to get the new business then they should receive appropriate compensation, but if you’re going to do all of the work then they should only be rewarded with a portion of it. Likewise, if the so-called new business is imminent and can soon be realized, then the seller’s percentage can be adjusted accordingly.

When it’s all said and done, it’s OK to pay for “blue sky,” but you cannot do so until you see for yourself that the sun is shining!

The key question here may be why would you want to wait for 60 days? Good businesses sell quickly, and if this is a solid business, chances are it will be gone in far less time to another buyer. Besides, the seller is probably highly motivated right now given that he wants to leave in 90 days.

The other thing to consider is whether you may be shooting yourself in the foot by waiting too long. Given the time it takes to close a deal, and I’m certain you’ll want to have a proper transition and training period, you can do more harm than good by waiting.

Sure you can be a bit “sneaky” and negotiate a deal now and then try to revise it, but that is never a tactic that I would recommend. Besides, with many long-term clients, you will want the owner to stay for a smooth transition period so that all of the accounts and employees are comfortable with you as the new owner.

In getting back to your original questions, my recommendation to “lock up” the seller is to aggressively negotiate the deal now, get a duly executed agreement in place, conduct your due diligence, and if there are any major issues, you can revisit them. Do a thorough job investigating and researching the business, allow for an adequate transitional period, and close the deal.

There’s no question that an LOI can be a logical approach as a first offer but by no means is it a standard step. In fact, it should be the exception. Personally, I like to move forward with a full-blown Offer to Purchase contract versus an LOI wherever possible because it gets all issues onto the table for resolution versus a non-binding LOI.

An LOI is best used for:

1. Large transactions
2. Situations where time is of the essence and you wish to tie up the business somewhat
3. Your valuation is dramatically lower from the seller and you want to put out a feeler to measure their counter on price and terms.

Insofar as the broker contract is concerned, the vast majority of agreements I have seen used by brokers are satisfactory as a template but almost always need some revisions to reflect the particular acquisition. My suggestion is that you first get a copy of the agreement the broker would like you to use. Review it and note your comments as well as any additional conditions/contingencies that you need to have as part of the contract. Then, send it to your attorney for review. Try to get it in “Word” format so your attorney can work off it as it will save you a ton of money versus having them redraft it.

GREAT question! Cash flow is probably the most frequently misused accounting term I can think of. Cash flow is NOT profit. First, understand that “cash flow” as a term for valuations is far more applicable in large business transactions, and not smaller ones where the buyer will be taking over from the former owner.

In its purest form cash flow means: “the amount of cash that the business had at the beginning of a period, what it had at the end of a period, and what happened to the difference.”

You’re probably going to come across this term during your search to buy a business in numerous locations such as business for sale Websites, financial statements, broker listings, etc. It is imperative that you get a breakdown of what is included in this so called “cash flow” number. More than likely, it is not the correct terminology for the figure you will review. What is often referred to as cash flow in small businesses for sale is actually the Seller’s Discretionary Cash Flow, Adjusted Income/Profit or Owner Benefit figure. This is typically the total of net income, owner salary, perks, depreciation, interest, and non-recurring expenses. (By the way, it should also include a provision for capital expenditure allocation, but that’s a whole different discussion.) As you can see, there is an enormous difference between what cash flow actually is, and what is represented to a buyer.

These are all excellent questions! I think it’s difficult to simply broad-brush an answer to you specifically because different businesses/industries will have a wide range of earnings as a percentage of revenues.

As an example, service business will typically enjoy enormous margins compared to distribution companies. Therefore, if you wish to have this figure play a significant role, your only considerations should be: is the net profit percentage after add-backs in line with industry standards and, second, how do the profits of one compare to similar businesses?

The question of which is better, higher profit percentages or revenue is strictly a matter of personal preference. I certainly prefer businesses that have higher margins, and I am less focused on the revenues. In fact, of my five golden rules that any business must have, high margins is one of them (the other four are: sales and marketing-driven, element of exclusivity in product/territory, demand in place, don’t compete on price).

The reason why high margins are more important to me is because my strength is in sales and marketing. I know I can build a business’ sales, and so if the margins are strong, the profits will surely follow. Conversely, it is difficult, if not impossible to significantly impact the margins of a business. Sure you can cut expenses, but the only long-term meaningful way to build a business is to grow the revenue. Therefore, if the margins and profit percentages are good, you’ll experience meteoric increases in profit as you significantly increase sales.

So in a long-winded way, my preference would be to pay more attention to the profit percentages unless you’re considering an industry with traditionally low margins and one that you are very familiar with operating.

You raise a very good point; however, the question is why you need the valuation specifically? Is it to secure financing? If so, most local dealers can be of assistance to you or the lender. On the other hand, if you simply want to learn if the assets you may be acquiring are worth what they’re on the books for, then you may want to look at it from another angle, which is to determine the road-worthiness of the vehicles and tractors and other equipment to determine when they will need replacing. You must also investigate the maintenance records of each asset.

Many prospective business buyers have an incorrect view of the business’ assets. I believe that the assets are nothing more than a vehicle (pardon the pun) to generate revenue. That is why you need to learn what the replacement costs are and when you’ll be faced with making them, as this can severely impact your cash flow.

Insofar as taking over payments on assets, it really depends on the business deal itself. Usually, you’re far better off to complete the purchase as an asset sale, and get all the assets “free and clear”, which will allow you to step up the value of each and depreciate them again as long as the purchase price is allocated properly (your accountant can assist you with this point). You may not enjoy the same depreciation schedule if you just take over the payments.

You bring up an excellent point. When you add back taxes, along with other standard “add backs”, your objective is to obtain a figure for the total Seller’s Discretionary Income (sometimes referred to as Seller’s Discretionary Cash Flow, or Adjusted Net, or Owner’s Benefit). You do not add back any sales taxes because that is not money that you, as the new owner, would have available after expenses to pay yourself a salary and service any debt. When looking at a business’ financials, you want to be certain that the revenue number being represented is net of sales tax. If by some chance it’s not, then you must check that there is an expense item for sales tax.

When it comes to sales taxes, the business is simply an “agent for the government” (sounds pretty neat) to collect and remit the taxes and so the inflow and outflow of the taxes is an accounting function only.

In nearly all small business sales, the seller will retain the cash and accounts receivables. They will pay off the payables, and deliver the business “free and clear” to you.

In larger purchases, the buyers will likely acquire these balance sheet items to provide them with immediate working capital. However, unless it is an especially large or complicated deal, you will usually not take the AR at closing.

With this being the norm, be certain that you have ample working capital available.

This is a very perceptive question/observation and there are two schools of thought. Before discussing them, you should be aware that calculating your ROI is not to be confused with determining the business valuation (we’ll discuss that in a moment).

In the first approach, from strictly an investment point of view, it would seem to make sense to deduct a salary for a manager from the Owner’s Benefit and therefore, determine your ROI compared to other potential investments.

The second approach looks at this from the individual’s perspective, meaning that you as the buyer and future owner/operator do not reduce the Owner’s Benefit for a manager and rather evaluate this as an opportunity compared to other comparable opportunities that you can consider.

Personally, I am a firm believer in the second approach because buying a business is your chance to forever say goodbye to working for someone else, to grow the business, and ultimately, sell it one day for a multiple of the Owner Benefit. Add to that the fact that you will clearly control your own destiny far more than any impact you could have investing in a public company.

Having said that, I do recommend that you evaluate your ROI including a manager’s salary to be certain that it fits within the acceptable boundaries based on your cash investment. For example, let’s say you that you are looking at a business that is generating $100,000 of Owner Benefit, and selling for $250,000 with $125,000 of seller financing (this scenario requires a $125,000 down payment from you). Assuming you hire a manager for $40,000, this will leave you with $60,000 to service the debt and pay yourself. Assuming a five-year seller note at 8% including Principal and Interest, the annual debt payment will be around $30,000, leaving you $30,000. Calculating the ROI on your cash investment (of $125,000) this will provide you with a 24% return, which is just slightly below the targeted 25% – 33% desired return for buying a business. However, once the debt is paid, and assuming all things remain equal, you’ll  generate $60,000 against your $125,000 cash investment, which brings a 48% ROI.

In summary, you simply need to evaluate the risk versus other investment possibilities.

That aside, let me restate that you will be buying a business to build YOUR future. While you may wish to calculate your ROI by including a manager’s salary, I do not feel it is appropriate to conduct your valuation with this net number. The valuation of a small business should be done based on the buyer replacing the seller and therefore having the benefit of the entire Owner Benefit figure (assuming all things remain the same after the purchase). While your point about investing in a business versus getting a job makes sense at the surface, I know that it is rare to have a job where you have absolutely no limit to the potential upside like you will have as the owner of a good business.

Your point about public companies is correct: you cannot compare multiples to those of a small business. However, the interesting thing about the huge gap between these two scenarios is that should you grow the business to a point that it may be attractive to be purchased one day by a public company, you can hopefully obtain a much higher multiple through the accretion that the buyer will achieve.

While most small business sales are “asset sales” where the AR generally remains with the seller, when the buyer does take the AR, there are a number of considerations.

The main priority of course is to be certain that the AR is collectible. To that end, it may require you having the ability to offset or reconcile any uncollected amounts and generally, anything past 90 days can be considered uncollectible.

The DSO (Days Sales Outstanding) is generally the guide for any discounts, as opposed to something industry-specific. Naturally, if you can discount the AR across the board it is advantageous for you; however, there must be an equal benefit to the seller or else they will just collect it themselves. Usually I like to work towards a 90 – 100 percent value on current AR (under 30 days), a 20% discount between 31- 89, and then leave anything over 90 days on an “as realized” basis. In other words, if collected, the seller is paid; if not, they are not compensated.