I received several comments regarding my last post on business sales. In response to those comments, please read this informative article by Peter Seigel of California Business For Sale which is the premier site for business sales in California. If you would like more information about selling your business,, please visit our website at www.empiresandiego.com.
Fewer Small California Businesses Changed Hands In August
Sale of small California businesses in August showed a decline to 1,722, from the 1,779 deals completed the prior month.
The month's major events, such as the Olympics and pre-election activities of the national parties, served as a distraction for some of the principals involved in business sales. And Many Californians took late-summer vacations this year, which delayed their business plans. These factors contributed to the decline.
While many of the state's counties recorded fewer completed sales compared to July 2008, there were notable exceptions such as Los Angeles County with a total 433 transactions concluded in August, compared to July's 407 tally; San Diego County where there were 185 closed deals in August compared to 179 in July; Imperial County, with 12 closed escrows in August and only 4 in July; San Joaquin, showing an increase to 36 from 23 completed escrows the prior month; and Contra Costa, where 35 transactions were closed in August, up from 27 in July.
Business sales declines in some of Northern California's "Wine Country" communities included Sonoma County's 3 recorded deals in August, compared to 9 the prior month, a drop off for Napa County to August's 3 completed escrows (there were 18 closings in July), and the slowdown in Solano County from 12 July deals to just 5 last month.
The number of small business sales completed in August 2008, shown by California county, as follows:
Alameda 93, Amador 1, Calaveras 3, Contra Costa 35, El Dorado 14, Fresno 30, Imperial 12, Kern 45, Kings 5, Los Angeles 433, Madera 2, Marin 13, Mendocino 1, Merced 12, Modoc 1, Mono 1, Monterey 31, Napa 3, Nevada 2, Orange 189, Placer 7, Riverside 56, Sacramento 66, San Bernardino 84, San Diego 185, San Francisco 100, San Joaquin 36, San Luis Obispo 15, San Mateo 19, Santa Barbara 23, Santa Clara 86, Santa Cruz 10, Solano 5, Sonoma 3, Stanislaus 31, Sutter 3, Tulare 10, Tuolumne 1, Ventura 52, Yolo 3, Yuba 1.
Tuesday, September 16, 2008
Monday, September 15, 2008
Business Sales On The Rise
The following article from Fortune Small Business discusses the increase in the sales of small businesses. Although I agree that during economic downturns the sale of “main street” business tend to rise, the article fails to point out several very important factors. First and most important is it does not discuss how the sale of the businesses was financed. Given the current commercial lending conditions for business purchases, it is my belief that there is a tremendous amount of seller financing that is occurring. This alone may explain why the median sale price has gone up. Traditionally, businesses sell for a higher price when the owner is willing to carry the debt service. This important factor is key for a Seller to understand so that they do not have an unrealistic expectation of the value of their business, and so they do not believe they will be able to sell their business for all cash since “business sales are on the rise”. The other problem I have with the article is that the information they are relying on is dependent upon one source. Despite the fact that this alone is not a good way to make sweeping generalizations about an economic indicator, the method of data collection by BizBuySell is totally reliant on brokers who also derive an economic benefit from reporting business sales are on the rise. In addition,the information from the brokers is not verified. There are many other limitations in the articles methodology but even given those, I do believe that this is a good time to buy a business when corporate jobs are not as secure, and because “main street” businesses will always be necessary for our country to operate. If you are interested in selling your business, make sure you work with an experienced business broker who understands both valuation and the business sales process. For more information on selling or buying a business, please visit www.empiresandiego.com. Enjoy the article below.
Sales of small businesses on the rise
The economy is struggling, but sales and valuations of small companies are up,
(Fortune Small Business) -- It's time to spruce up the window displays and organize your accounting records: Despite the economic downtown, sales of small businesses are starting to boom.
Business marketplace BizBuySell's latest quarterly Insight Report on nationwide sales trends shows a 48% jump in the number of businesses listed on its network that sold during the first half of 2008, compared to the year-earlier period. A total of 3,894 businesses found buyers, up from 2,640 in the first half of 2007.
Listing rose in tandem: BizBuySell.com had 41,674 active listings on its site in 2008's second quarter, up from 29,468 during the same period last year, a 41% increase. Most promisingly for business owners, the prices buyers are paying have also increased. The median sale price for businesses tracked by BizBuySell was $200,000 in this year's second quarter, up from $186,000 during the same period last year.
BizBuySell, the largest nationwide marketplace for buying and selling small companies, compiles its sales data from closed-transaction reports sent in by brokers. For-sale-by-owner deals closed directly are not included in the totals.
BizBuySell General Manager Mike Handelsman was surprised by the listings jump, considering the slumping economy. "We expected to see a decline, but all metrics are on the rise," he said.
But to William Bruce, president of the American Business Brokers Association, an inverse trend between small-business sales and the health of the overall economy isn't unusual.
"When the economy slows, business executives want to downsize and employees have a fear of being transferred, outsourced or fired," he said. "As a result, these employees see small-business ownership as an attractive and viable opportunity." Plus, layoffs often bring with them severance packages - a good source of capital for people considering launching their own ventures.
Another promising sign for business owners: Valuations are also increasing. The average multiple of revenue for businesses sold in the second quarter was 0.69, according to BizBuySell's data, up from 0.64 a year ago. That means that a business with $395,000 in annual revenue (the median for BizBuySell's second-quarter data) would sell for an average of $272,550.
At the high end of the market, sales are shakier. Two years ago, a feeding frenzy of small business sales was driven in part by the easy availability of credit and financing for acquisitions. Today, banks are warier about lending.
Private equity network NVST, which gathers information on merger and acquisition market activity, is having a hard time finding completed transactions. "I attribute this to the downturn of economy and lack of available credit for financing deals," said NVST editor Andrew Dolbeck.
Indeed, according to FactSet Mergerstat the number of deals valued at $100 million or less started plummeting in 2007. In the first two quarters of 2008, FactSet tracked 3,106 companies sold, down from 4,433 companies in the same quarters last year.
But while Wall Street struggles, buyers and sellers sticking to Main Street are still seeing a robust market.
"It's a good time to buy if you have the resources
Sales of small businesses on the rise
The economy is struggling, but sales and valuations of small companies are up,
(Fortune Small Business) -- It's time to spruce up the window displays and organize your accounting records: Despite the economic downtown, sales of small businesses are starting to boom.
Business marketplace BizBuySell's latest quarterly Insight Report on nationwide sales trends shows a 48% jump in the number of businesses listed on its network that sold during the first half of 2008, compared to the year-earlier period. A total of 3,894 businesses found buyers, up from 2,640 in the first half of 2007.
Listing rose in tandem: BizBuySell.com had 41,674 active listings on its site in 2008's second quarter, up from 29,468 during the same period last year, a 41% increase. Most promisingly for business owners, the prices buyers are paying have also increased. The median sale price for businesses tracked by BizBuySell was $200,000 in this year's second quarter, up from $186,000 during the same period last year.
BizBuySell, the largest nationwide marketplace for buying and selling small companies, compiles its sales data from closed-transaction reports sent in by brokers. For-sale-by-owner deals closed directly are not included in the totals.
BizBuySell General Manager Mike Handelsman was surprised by the listings jump, considering the slumping economy. "We expected to see a decline, but all metrics are on the rise," he said.
But to William Bruce, president of the American Business Brokers Association, an inverse trend between small-business sales and the health of the overall economy isn't unusual.
"When the economy slows, business executives want to downsize and employees have a fear of being transferred, outsourced or fired," he said. "As a result, these employees see small-business ownership as an attractive and viable opportunity." Plus, layoffs often bring with them severance packages - a good source of capital for people considering launching their own ventures.
Another promising sign for business owners: Valuations are also increasing. The average multiple of revenue for businesses sold in the second quarter was 0.69, according to BizBuySell's data, up from 0.64 a year ago. That means that a business with $395,000 in annual revenue (the median for BizBuySell's second-quarter data) would sell for an average of $272,550.
At the high end of the market, sales are shakier. Two years ago, a feeding frenzy of small business sales was driven in part by the easy availability of credit and financing for acquisitions. Today, banks are warier about lending.
Private equity network NVST, which gathers information on merger and acquisition market activity, is having a hard time finding completed transactions. "I attribute this to the downturn of economy and lack of available credit for financing deals," said NVST editor Andrew Dolbeck.
Indeed, according to FactSet Mergerstat the number of deals valued at $100 million or less started plummeting in 2007. In the first two quarters of 2008, FactSet tracked 3,106 companies sold, down from 4,433 companies in the same quarters last year.
But while Wall Street struggles, buyers and sellers sticking to Main Street are still seeing a robust market.
"It's a good time to buy if you have the resources
Thursday, September 4, 2008
Using Earnouts In The Sale Of A Business
An earnout is a contractual arrangement in which the purchase price is stated in terms of a minimum, but where the Seller will be entitled to more money if the business reaches certain pre-agreed upon goals in the future. These goals are typically stated in terms of percentages of gross sales, rather than net sales, because expenses are easy to manipulate and thus net sales are too easily distorted.
Earnouts are a powerful tool that can be used in negotiations as a contingent element, which help the Seller and the Buyer reach a mutually agreeable value of the business. However, this is a very complicated contractual arrangement and should be prepared by an attorney who has expertise in setting up earnouts. In addition, the buyer and seller would be wise to have an experienced attorney review the document before entering into the agreement.
An earnout can be designed and written many different ways. For example:
1. An earnout may pertain to only specific products or services that were part of the business prior to the acquisition.
2. The earnout may only be applicable to revenue after the business surpasses a specified sales amount.
3. An earnout can also be based on units sold.
For the Seller, there are significant risks they must address when considering entering into an earnout agreement.
First, the Seller needs to be able to verify the numbers that the buyer submits once he or she has taken over the business. In addition, the Seller must also make sure that the buyer does not manipulate the sales of a particular product in order to avoid paying the earnout. Or, there is always the risk that the buyer will not report cash sales, or encourage customers to pay in cash so they can hide the income.
Using earnouts can be advantageous to getting a deal done. However, proper controls need to be in place to ensure nobody takes unfair advantage of the opportunity.
Earnouts are a powerful tool that can be used in negotiations as a contingent element, which help the Seller and the Buyer reach a mutually agreeable value of the business. However, this is a very complicated contractual arrangement and should be prepared by an attorney who has expertise in setting up earnouts. In addition, the buyer and seller would be wise to have an experienced attorney review the document before entering into the agreement.
An earnout can be designed and written many different ways. For example:
1. An earnout may pertain to only specific products or services that were part of the business prior to the acquisition.
2. The earnout may only be applicable to revenue after the business surpasses a specified sales amount.
3. An earnout can also be based on units sold.
For the Seller, there are significant risks they must address when considering entering into an earnout agreement.
First, the Seller needs to be able to verify the numbers that the buyer submits once he or she has taken over the business. In addition, the Seller must also make sure that the buyer does not manipulate the sales of a particular product in order to avoid paying the earnout. Or, there is always the risk that the buyer will not report cash sales, or encourage customers to pay in cash so they can hide the income.
Using earnouts can be advantageous to getting a deal done. However, proper controls need to be in place to ensure nobody takes unfair advantage of the opportunity.
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