Platt Perspective on Business and Technology

Should I stay or should I go? 26: selling-off and buying out an already established business 6

Posted in career development, job search, job search and career development by Timothy Platt on September 4, 2016

This is my 26th installment to a series on intentionally entered into, fundamental job and career path change, and on best practices for deciding both when and how to carry through on it (see Guide to Effective Job Search and Career Development – 3, postings 416 and following for Parts 1-25.) And this is also my sixth posting to this series on buying or selling a small business or professional practice as a next step career move.

I began discussing the issues of buying and selling a small established business or professional practice from the buyer’s perspective in Parts 21-23 of this series. I then began addressing this complex of issues from the seller’s perspective in Part 24 and again in Part 25.

I offered Part 24 in large part as a road map for a seller-side discussion to come, and focused on the first of its issues in Part 25, which I repeat here for purposes of maintaining continuity of narrative here:

• The question of what would be sold off and what this means to the person who built this enterprise, who would now be stepping away from it.

And I continue from that here, with the second to-discuss point that I raised in Part 24:

• The question of what that is worth and what can realistically be asked for.

I begin addressing this by noting two crucial details. The first is that while a number of factors and considerations enter into any complete answer to this type of question, it makes sense to at least begin addressing it from a bookkeeper’s and accountant’s perspective and strictly in terms of quantifiable monetary factors. And the second is that I could have just as easily and legitimately included this in a buyer’s side discussion, as here.

• A reasonable seller in this type of transaction, seeks to reach terms of sale and final agreed-to cost with a buyer that covers the full value of what they are selling, net of any debt obligations or other costs that this buyer would contractually assume – and ideally with that seller taking at least something of a profit out of this transaction too.
• And buyers seek to complete their acquisition of this business at a cost and under terms that they can afford. And they seek to do so under terms and at a final overall cost that leaves them in a position where they can start to run what is now their new business venture, profitably.
• Ideally, price and terms of sale can be arrived at that both sides can come to see as favorable to them in this, with this transaction process leading to a win-win resolution.

What is actually being sold here, and bought? What is this worth? And how is this overall valuation best determined, and to the mutual satisfaction of both buyer and seller? Start with the most important assets and liabilities that would enter into these calculations. What would be the most consequential of them financially, and from a buyer’s perspective for their long-term prospects as they take over and begin to run this business.

• For a small professional practice and from a buyer’s perspective, the single most valuable asset can easily be this business’ clientele and their customer loyalty. If this is in fact a significant source of value here from a buyer’s perspective, a seller needs to think through and understand its value from their perspective – and in this case in terms of volume of business, revenue received, and profits generated from business done with their steady repeat-business customers.
• But even if that customer list is valuable, business-associated real estate assets might be worth much more, to cite a second common possibility here. A selling business owner who holds title to and full ownership of the building that their business is located in, and title to the land under it (which might be very different for ownership claim), might be selling a valuable, profitable small business. But if real estate prices and market values in their area are going up, this aspect of this business acquisition might make this entire venture a stronger proposition for any buyer.
• Equipment, inventory, parts, furniture and furnishings and all of the other small and large item assets that would be included in this sale enter in here too, of course. And while the detail-work for determining everything’s overall valuation here might be time consuming and even arduous, the basic principles and the basic valuation parameters that enter in this process are quite straight forward. What did some particular item on this list cost when initially purchased? Start with that price in setting its baseline valuation, and then reduce from there according to wear and tear, and age and according to standard age related depreciation tables. Then repeat and repeat and repeat, until you have established a fair market value for everything held that will be sold with this business venture. And add all of that up.
• Remember to include everything here that will go with this business. Include resources such as old inventory that is not moving and that may be held off-site but that is still listed as inventory, and any vehicle or other asset that the business holds as a matter of record – and even if it is not usually used for business purposes. If it is legally held as an asset of this business, it has to either go with the business at point of sale, or be negotiated as no longer constituting a business asset that a buyer would take ownership of, when buying. (I am thinking of a specific “personal car” that legally wasn’t separately owned by a business seller as I write this.)

List all assets that would enter into this sale and include them in this valuation determination. Now arrive at an overall asset valuation that buyer and seller can agree to. And at the same time, buyer and seller have to come to agreement on any liabilities held that would be assumed by the buyer.

• To cite one possible example here: if a business seller has an outstanding mortgage on their business or is paying off a business loan for it, would the buyer assume this debt obligation, and if so under what terms? The bank or other lending institution would have to agree to any such transfer of responsibility and to the terms that the balance of this would be paid off, under. Or would the seller pay off any balance due, plus any fees involved, removing this from consideration by the buyer? This type of detail has to be thought through and mutually agreed to, as well in determining the overall value of the business.

And this brings me to vender and supplier agreements and any supply chain agreements that a business seller has been using and benefiting from. Usually, partner businesses appreciate the opportunity to continue working with a client or partner business, as it continues to operate under new ownership and management. Do business-to-business relationships of this type, add to the marketable value of a business or practice that is up for sale, where for example a seller can offer a buyer something of a guarantee of more favorable terms when purchasing some essential business-to-business service, or some category of inventory? What would this be worth, when compared to what these resources would cost the buyer, if they were to simply set up a new business from scratch instead of buying out this established enterprise?

And with this, I finally come to the asset that would probably be first to come to mind for most readers here: this for-sale business’ cash flow and profitability. How it is performing now, and what does this suggest as to its future prospects?

Look at the business and its customers here, but look beyond that too, to the community and the immediate neighborhood that this business operates in. If, to cite a possible example, the business in question is a diner or small restaurant that has been drawing a large percentage of its clientele from a local factory and its workers and that factory is expanding its facilities and headcount, that would suggest very different prospects for this business, than would news of a possible plant closing.

That is why I listed this first point last: cash flow and profitability and certainly when considered prospectively, mean looking both at the business and at its wider community context.

I am going to continue this discussion in a next series installment, where I will assume a basic agreement to sell and to buy has been reached, and the issue becomes more one of precise terms and details:

• The question of timing, and of whether a seller would simply walk away in one step, or stay on through a transition period.

I will also at least briefly discuss staff retention there. Meanwhile, you can find this and related postings at my Guide to Effective Job Search and Career Development – 3 and at the first directory page and second, continuation page to this Guide.

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