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Small Business Transactions Up 18%, Sellers Earn Higher Sale Prices

  
  

BizBuySell 
October 6, 2014

BizBuySell.com's Third Quarter 2014 Insight Report shows transaction levels still on pace for record-breaking year, sellers now receiving a higher percentage of asking price and improved cash flow multiples

San Francisco, CA - October 6, 2014 -- BizBuySell.com, the Internet's largest business-for-sale marketplace, reported today that third-quarter small business transactions remained at historically high levels. The full results are included in BizBuySell.com's Q3 2014 Insight Report, which aggregates statistics from business-for-sale transactions reported by participating business brokers nationwide. 

A total of 1,987 closed transactions were reported in the third quarter this year, representing both a 17.9 percent increase from last year and the highest number of small business sales recorded in a third quarter since BizBuySell began tracking data in 2007. In fact, this quarter's numbers slipped just 2.1 percent from the second quarter of 2014, which remains the most active quarter for small business sales since before the recession. It also keeps 2014 on pace to record the highest number of small business transactions since the report's inception.

"After seeing a return to robust transaction activity during 2013, it's good to see that we have not plateaued and both buyers and sellers are still eager to make deals happen," said Bob House, Group GM of BizBuySell.com and BizQuest.com. "There remains a strong supply of quality small businesses on the market. As the economy and financing options continue to improve, buyers remain very interested in acquiring small businesses."

Financials Show Market Shift Beginning to Benefit Sellers

While the post-recession market has generally favored buyers, a shift appears underway, with sellers now receiving higher sales prices. The median sale price for businesses sold in the third quarter rose 5 percent compared to last year, increasing from $180,000 to $189,000. Meanwhile, the median asking price remained virtually unchanged, rising just 0.5 percent from $199,000 to an even $200,000. This means sellers in the third quarter were able to receive roughly 95 percent of their asking price, the highest percentage we've seen since the recession hit in mid-2008. Active sellers appear to be taking notice of the market change as the median asking price of businesses listed on BizBuySell.com also increased 4.3 percent in Q3.

Sellers' increased negotiation power is likely a result of stronger small business financials. Both the median revenue and median cash flow of businesses have risen each quarter of 2014, and were up 1 percent and 2 percent respectively in the third quarter.

But perhaps even more telling is how much sellers are receiving in relation to their revenue and cash flow. The average revenue multiple grew nearly 6 percent this quarter compared to last year, now up to .62. At the same time, the average cash flow multiple jumped even higher, up nearly 9 percent to 2.38.

While buyers are still receiving good value for their investments, rising multiples show that sellers are now successfully translating their financial growth into higher sales prices. It's a sentiment we also saw sellers express themselves in BizBuySell's recently released Buyer & Seller Confidence Survey. The study revealed sellers are more confident they will receive an acceptable sales price this year than they were last year. In fact, 21.2 percent of sellers said they were "very confident" they could sell at an acceptable price, a 20 percent increase from those who felt the same in the 2013 survey. Nearly 47 percent of those that were more confident this year credited improving business financials as the primary reason, a feeling that is reflected in the rising revenue and cash flow data this quarter.

"After hearing sellers voice their confidence in the survey and now seeing this transaction data support their claim, it certainly appears some momentum is shifting back towards a balanced market," House said. "The supply of small businesses being listed is still growing and we believe it will continue to be a great time for both buyers and sellers to enter the business-for-sale market."

Even with increased seller confidence, buyers also remain generally confident with 78.6 percent believing they can buy at an acceptable price, according to the same survey. Improving lending conditions and the overall growth of the economy are helping buyers meet the higher demands of sellers. Buyers are also benefiting from the increasing number of sellers willing to offer seller financing in order to push deals through. In the BizBuySell Confidence Survey, nearly 30 percent more sellers planned to take on part of the financial burden through seller financing than planned to in 2013.

More Manufacturing, Service, & Restaurant Businesses on Market

In addition to an increasing number of closed sales in Q3, there were also a growing number of businesses listed for sale. Total listings were up 2.2 percent from the same time last year, with the most notable growth in manufacturing businesses (up 4.1 percent), service-industry businesses (up 3.9 percent) and restaurants (up 3.5 percent).

These sectors also saw an increase in the number of closed transactions. Service-related businesses led the way with a 17 percent increase while manufacturing was up 16.2 percent and restaurants up 13.3 percent compared to last year. The overall mix of sold businesses remained consistent with last quarter.

High Transaction Activity Likely To Continue Through End of 2014, Into 2015

As mentioned above, 2014 remains on pace to record the highest number of closed transactions reported since the BizBuySell Insight Report inception in 2007. There is increasing supply and demand in the market, and if this continues as expected, both buyers and sellers will be confident enough to enter the market. In fact, in our recent Buyer & Seller Confidence Survey, 95 percent of buyers and 75 percent of sellers hope to close a deal in the next 1-2 years.

"It's an exciting time in the business-for-sale market as conditions continue improving and that growth is being reflected in both the financial and total transaction data of small businesses," House added. "We're excited to see what 2015 brings to the market."

 

The Importance of Knowing the Value of your Company

  
  

By, Kevin Freeman, CBI, Managing Partner, Stony Hill Business Brokers

As an M&A Intermediary and Business Broker, I speak to hundreds of business owners every year, and it never ceases to amaze me that 80% of them have absolutely no idea what their business is worth nor any concept of their exit plan.

“Failing to plan is planning to fail…”

Business Owners spend incredible amounts of time, resources and finances growing their business, however, in many cases have no focus on the end goal of the company. They do not plan for an eventual exit and therefore leave hundreds of thousands of dollars or more on the table because they simply did not have an exit strategy. That strategy can change over time, as life throws curveballs and personal factors come into play.

“Your company is worth what someone or another company is willing to pay for it…”

A solid exit plan begins with a business valuation. As I said, I am amazed on a daily basis how many business owners have no clue what their company is worth. They may have a few preconceived notions about multiples of revenue or profits based on another deal they heard about, but no real idea on value.

Ultimately, the final “value” of a company is what someone or another company is willing to pay for it. Understanding that value is a key element of successful business growth. Factors that we look at in determining a company’s value are: Industry trends, Industry Comps, Revenue, Cash Flow (net profit), EBITDA (earnings before interest, taxes, depreciation and amortization), customer concentration, contracts and employees amongst other things. We determine what a business will sell for and why, NOT what it is worth to the owner…this is crucial data that will help in all phases of business growth.

Contact Stony Hill Business Brokers today to begin your exit plan with a Business Valuation.

6 issues to consider before hiring a business broker

  
  

When selling your business, you have two options:

  1. Sell your business yourself
  2. Hire a business broker

While it’s possible to successfully sell your business on your own, hiring a business broker often guarantees a quick and painless sale.

Unlike many small business owners, brokers have years of experience in selling small businesses. They know what works and what doesn’t, making them extremely helpful when handling tasks such as business valuation, advertising or marketing, prospect interviews, negotiation, due diligence, and other critical aspects of the sale.

Hiring a broker also allows you, the owner, to focus on running the business and increasing its value while the broker handles the details of the complex transaction.

If and when you decide to hire a broker, make sure you properly vet your options, as having a quality broker can mean the different between a successful business exit and a long and costly sale.

Whether you are choosing a new broker or deciding if your current broker is right for your upcoming sale, here are six key areas you should address:

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Should you sell your business? How? And then what?

  
  

 

Should you sell your business? is a big question. It can be up there with Is she the one? or Should we have one more baby? Maybe it’s not that big, but it can certainly change the direction of your life.

The subject is too complex to be covered briefly, but this article will provide an overview of the issues a business owner needs to address when considering a sale. In particular, we will focus on how to assemble a strong team to guarantee a totally smooth process. (I’m kidding – there is no such thing as a totally smooth business sale. However, there are ways to improve the odds of a positive outcome.)

We will address the following topics, with particular emphasis on question No. 4, since working with the right people can go a long way toward successfully handling the rest:

1. Why Sell?

2. For How Much?

3. Who Is the Buyer?

4. Who Will Help You?

5. What Should You Do With the Proceeds?

6. What Do You Want to Do With the Rest of Your Life?

Continue reading!

Business is Good... So Why Sell?

  
  

Statistics show that 50 percent of new businesses fail within the first year. That number jumps to as high as 95 percent within five years. Knowing this, if you’re currently running a successful business and raking in profits, it has tremendous value. And even though things might be going quite well, this is exactly why selling your business makes sense - even when things are good.

Buyers though are sometimes stumped as to why anyone would sell when business is going smoothly. It’s often viewed as suspicious and even too good to be true. Most potential buyers might agree that there aren’t enough good businesses around worthy of investing in. But when a good one does present itself, countless questions arise to the validity of that sale arise.

As a buyer, it’s important to look a littler deeper into the common reasons why people are willing to hand over a good business that’s performing well. Divorce, health issues, a family death, retirement and even sheer boredom are all valid and ordinary reasons to put a business up for sale. The latter is probably the more common than expected, as entrepreneurs tend to be adventurous, always seeking a new and exciting opportunity. For a person who has never bought or even owned a business, it can be difficult to grasp the concept of moving on to something new, especially when business is profitable.

It’s important for buyers to focus on more pressing matters than why a business is being sold. Revenues, profits, growth potential and ease of transition all weigh more heavily than that one factor. As long as records and documentation confirm that the business is in fact in good health, everything else is more likely to fall into place.

Are you thinking about buying or selling a business? Take the first steps by downloading one or both of our free reports: 7 Questions to Ask Before Buying a Business and 7 Questions to Ask Before Selling Your Business.

Testimonial

  
  

I first met Kevin Freeman in 2008.  I owned 2 small businesses and I was interested in purchasing a third.  I was looking for an existing business that already had a strong support team in place and also had room to grow.  Kevin found a business for sale that met all of my requirements, Westway Electric Supply.   We went ahead with the purchase and Kevin was instrumental throughout the process and even helped me locate a bank willing to finance the deal.  The process went very smoothly.

After a few years I was able to grow the business through a new website, www.WestwayElectricSupply.com, and I no longer had time to manage my other two business.  I went back to Kevin and asked him if he could sell them quickly.  Kevin went to work and soon had a number of potential buyers for each business.  He helped me sort through the offers and determine who were legitimate buyers.  He continued to advise me throughout the selling process and we got both businesses sold within our target price range and before our target date.  I will definitely continue to use Kevin's services in my future dealings.

Anthony Buonocore

President, Westway Electric Supply

Smart CEO Magazine

  
  

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We are pleased to announce that our Managing Partner, Kevin Freeman, was featured in Smart CEO magazine. Please see the article below and as always please feel free to reach out to Stony Hill for all your exit planning and business acquisition needs.http://viewer.zmags.com/publication/9d7e8af8?page=16&nocache=1358367227031#/9d7e8af8/16

Can You Sell a Business Without Professional Help?

  
  
When you are ready to sell a business what type of assistance will you need to do so successfully? If the thought of selling a business on your own seems like a good idea, you may want to rethink that approach. In theory, taking it upon yourself to wheel-and-deal a business sale can seem like an invaluable learning opportunity. However, in reality, a DIY effort is better left to home improvement projects — not the prospect of selling a company.

Here is what you risk losing when you choose to sell business without professional help.

Time
Figuring out how to sell a business can be a time-consuming endeavor. During the daily operations of successfully running and maintaining a business, is there enough free time for you to act as your own selling agent? Probably not. Professional help can drum up buyer prospects while you keep the company up and running.
Focus
Time is not the only thing you need to keep a business afloat when considering selling it. You need focus, too. Business services and costs still need your full attention, especially during a business sale. A large part of successfully selling a business involves scrutinizing the numeric bottom lines. A professional business broker company can help with those final details while you manage the finer details of your daily costs.
Privacy
Information leaks of a potential business sale can send current and prospective clients and vendors scrambling for a protective exit zone. Hiring professionals to help sell your business helps to keep a lid on pending transactions and keep your clientele intact. Without customers and suppliers, your business could lose the fortitude it needs to appear an attractive package for potential buyers.
Need more pointers on how to get started with selling your business? Download our free guide now!

Wealth Management

  
  

So, you are going to realize some or all of your investment in your business… now what?

Rarely in life do you come to a true, unmistakable fork in the road.  Marriage and parenthood come to mind.  A business exit can be similarly monumental.  

Hopefully you go through the exit process with a surplus of good advice.  Business brokers, attorneys, accountants, and bankers can all be sources of guidance (ideally your various advisors work in concert to provide a cohesive and coordinated framework of advice).  As Wealth Managers, our role is to help coordinate the big picture that exists somewhat apart from the transaction itself.  In particular we help answer two key questions:

1)      How much money do you need to meet your goals?

2)      What is the best way to position your assets to maximize your chances of success?

Just as your advisors should coordinate their input during the business exit or recap, an ideal wealth management process involves ongoing collaboration between multiple providers such as your CPA, estate attorney, insurance broker, and others.  Our task as Wealth Managers is to help organize the many disparate but related areas of your financial life (some of which may have been neglected while you were focusing on the business).

Some important areas of consideration:      

1)      Estate planning - The estate tax rules have been in flux, and the sale of a business means your personal situation may have changed dramatically.  It is time to revisit your trust and estate documents.  The sooner you begin your planning ahead of the exit, the more options you may have in terms of keeping assets in the family.

2)      Insurance coverage - With more wealth comes more liability exposure.  We recommend a full review of all forms of insurance in order to reveal potential areas of exposure, and to maximize your level of coverage per dollar spent. 

3)      Qualified and non-qualified retirement plans – Evaluate rollover and distribution options with an eye toward tax efficiency. 

4)      Investment of sale proceeds - Given low interest rates, high government debt, and varied geopolitical risks, this is a difficult environment for investing.  We recommend hyper-diversification and a thorough examination of issues such as costs, tax impact, and cash flow timing.    

 If you are realizing a successful exit from a business chances are you understand the importance of planning and preparation.   Apply those concepts to your wealth management process to increase your chances of long-term success.

By Patrick M. Foley, CFP®, QPFC

Robert W. Baird & Co.

www.FoleyWealthManagement.com

Tax Considerations When Selling Your Business

  
  

If you are considering selling your business, tax rates, including the capital gains rate, need to be a consideration for you.  To minimize your tax payment you will want to plan for the best date to complete the transaction.  And before any further explanation, you will want to talk to your accountant or lawyer or both.  The potential issues are way more complex than this short post.

What portion of your sale becomes subject to capital gains tax or regular income tax depends on several variables:

  • The legal structure of your business

  • What exactly is being sold?

  • Future tax rates

The Legal Structure

If your business is a C Corporation, then the sale of the business may be retained within the corporation without impact on your personal 1040.  As long as the company does not pay a dividend back to the shareholders equal to the amount of the sale, there will be only the corporate tax rates to pay.  When money is distributed it becomes personally taxable.

If your business is an S corporation, an LLC or other limited liability entity, or is a proprietorship, the proceeds of your sale will be passed on to the individual owners at the rates then in force.

What are you selling?

Are you selling the company as a whole or are you selling the assets of the company.

If you are selling your C Corporation and transferring stock ownership, the rules of capital gains for individuals apply.  This is primarily how long you have owned the stock.  If you are selling the assets, as is commonly the case, the corporation will report the sale with some items as capital gains and other as normal income.

If you are selling the assets of a pass through entity, a proprietorship or partnership, the proceeds from the sale are taxable on the personal returns of the owners with some assets taxed at capital gains rate and others at personal rates.

Future tax Rates

Capital Gains Tax Considerations for Selling a Business in 2012 are more favorable.  Both income and capital gains tax rates are scheduled to increase in 2013.  While there have been a number of proclamations from the political world that rates should not go up, basing your plan on what is in today’s law would suggest that doing it before the end of 2012 is a good idea,

 

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