What a “Business For Sale” Really Means

Date:

Share post:

Having a business for sale can mean a lot of things – more than people might think. How does one business value compare to another, and how to arrive at that value? Because there are many types of businesses that exist for many different industries, it stands to reason there are numerous ways of approaching the process to find the value.

There are the three main approaches to value, which are the income approach, the market approach, and the asset approach. There are variations of these approaches, and combinations of them, and things which must be looked at because each and every business will have variations of what gives the business worth, and some of these differences are substantial.

First we must identify the type of sale: stock sale or asset sale. A stock sale is the sale of the company stock; the buyer is buying the company based upon the value of its stock, which represents everything in the business: earning power, equipment, goodwill, liabilities, etc. In an asset sale, the buyer is buying the company assets and capital which enable the company to make profits, but is not necessarily assuming any liabilities with the purchase. Most small businesses for sale are sold as an “asset sale”.

Our question, when selling a business or buying a business, is this: what are the assets considered to arrive at an accurate value? Here we will look at some of the most common.

1. FF and E: This abbreviation stands for furniture, fixtures, and equipment. These are the tangible assets used by the business to operate and make money. All businesses (with a few exceptions) will have some amount of FF&E. The value of these can vary greatly, but in most cases the value is included in the value as determined by the income.

2. Leaseholds: the leasehold is the lease agreement between the owner of the property and the business that rents the property. The agreed upon leased space typically goes with the sale of the business. This can be a significant value, especially if there is an under market rate currently charged and the lessor is obligated to continue with the current terms.

3. Contract rights: many businesses do business based on ongoing contracts, agreements with other entities to do certain things for certain periods of time. There can be immense value in these agreements, and when someone buys a business he or she is buying the rights to these agreements.

4. Licenses: in certain business sales, licenses do not apply; in others, there can be no business without them. Building contracting is one of them. So is accounting. For a buyer to buy a business, his purchase includes either buying the license to the company or the license to the individual. Often times, the buyer will require the access or availability of the license as a contingent element of the sale.

5. Goodwill: Goodwill is the earnings of a business above and beyond the fair market return of its net tangible assets. In other words, whatever the business makes in excess of its identifiable assets is considered “goodwill” income, where there exists a synergy of all of the assets together. This one can be tricky. Most business owners assume they have goodwill in their business, but goodwill is not always positive; there is such things as “negative” goodwill. If the business makes less than the sum total of its identifiable assets, there exists negative goodwill.

6. Trade secrets: some businesses are all about secrets. The reason the business is in operation may be because of a trade secret, some aspect of a product or service that sets it apart and gives it a market. In a business purchase, these secrets have value and go with the sale.

7. Trade names, telephone numbers, websites, and domain names: some businesses generate business simply because of its name and identifiable aspects. If those were to change, so would the profits. So in buying a business, the buyer will have need of those names and numbers to continue on in business. Of course, in some cases these things would not matter at all, and that is why each one must be approached individually.

8. Works in progress: a construction company may have a multi-million dollar job going on at the time of the sale, which can take months to complete. In case such as this, the buyer would have need of continuing on in the particular job the company was engaged in; for money and for reputation. This is considered a work in progress and has value and therefore is considered an asset and made part of the sale.

9. Business records: the history of a business detailed in documents and spreadsheets must necessarily become part of the business sale. The new owner can make use of records in identifying progress, tracking increased or decreased sales, adjusting expenditures and depreciation rates, etc. When someone purchases a business, they are buying the current operation and all the details that led to it.

10. Real estate: the seller-owned property on which the business does its business is inherent to the operation and therefore the value. There are times when the new buyer needs to move the business to purchase it, but more often the real estate is viewed as a major aspect of the business value, especially if there is equipment attached to the property and buildings suited specifically to the business.

When a business for sale is valued by a professional appraiser, a business broker, or a business owner, more than just the income is considered. Assets, economic values used by the business to produce revenue and profits, are weighed heavily to determine the worth of the business. And they must be considered to understand what a “business for sale” really means to a buyer.

Rhett Kniep is a licensed building contractor and real estate broker. For over a decade he has successfully worked in the real estate investment business, buying and rehabbing and selling investment homes, commercial real estate, and businesses. He enjoys sharing his learned insights in business and property development with others.

1,000FansLike
1,000FollowersFollow
1,000FollowersFollow
spot_img

Related articles

How to Write a Business Plan That Will Help You Achieve Your Goals: The Ultimate Guide

Ah, the business plan – the backbone of every successful venture! It’s that magic potion that can pave...

Modern Business Ideas for the Eco-Conscious Entrepreneur: Green Is the New Gold

Gone are the days when businesses cared solely about profit margins. Today, eco-consciousness isn't just a buzzword –...

Insolvency Advice

What is insolvency? Insolvency refers to when either an individual or business are no longer capable of meeting their...

A small business guide to digital marketing

42% of small-scale entrepreneurs confess that they do not utilize social media channels as a marketing strategy to...

Top Networking Tips For Consultants

Professional networking can be invaluable in any industry. For consultants, networking offers the ideal platform to promote their...

Ways to Have a Strong Legal Stance After a Trucking Accident

You never saw it coming. One moment, you were simply going about your day, and the next, your...

Business Management Tips to Aid Your Company’s Growth

Business Management Tips to Aid Your Company's Growth Business Management Tips: Business management is a complex concept that encompasses...

Here are 5 tips to recognize a meaningful business opportunity when you see one

You've discovered a remarkable market inefficiency It is no surprise that solving a meaningful problem leads to the best...

Five Tips to Recognize a Meaningful Business Opportunity when You See One

You have discovered a notable market inefficiency It's no surprise that the best ideas are generated when there is...

Here are 8 reasons business cards still matter.

Ease Of Giving Contact Details One reason business cards still matter in use is the ease with which they...

Are businesses still using business cards?

Are businesses still using business cards? Are you worried about your small Business Card? Customers trust businesses only after...

What’s the business?

What exactly is business? What exactly is business? It's a procedure that produces, sells and distributes products and...
error: Content is protected !!