5 Types Of Discretionary Earnings To Be Aware Of Before
Selling a Business
By Peter C. King, CEO of VR Business Sales/Mergers & Acquisitions
1. Owner’s Salary
Most business owners do pay themselves some salary on the books. The key here is whether there are other members of the family included in the payroll expense, and whether or not these individuals serve a function in the business. (A buyer can only replace one salary, so be careful which salary(s) among the family members you include in DE.)
2. Discretionary Expenses
These are expenses that are not essential to the operation of the business but are a method of deriving income from a company. Examples include additional travel and entertainment expenses, additional utility bills, additional car expenses, etc. Sometimes, business owners contract for services and have both personal and business work done by accountants or legal counsel.
Depending upon the nature of a business, certain expenses may or may not qualify as discretionary. For example, the interest expense for a boat dealership is a “flooring” expense and a necessary expense for doing business. Very often, the interest for credit cards accepted shows up in this expense; another necessary item. However, the interest on a personal loan is discretionary.
Usually, it is a matter of having the expense explained by the seller. Items such as postage, dues and subscriptions, contributions, advertising, repairs, insurance, and garbage removal may or may not apply to the business and therefore, they need to be explained.
3. Non-Recurring Expenses
Non-Recurring Expenses are one-time charges and are not expected to occur again in the future.
4. Non-Cash Expenses
Non-Cash Expenses are those expenses that are accounting entries for depreciation or amortization. While they may be true values for financial purposes, we add them to our DE computation. (Investigate whether the depreciation is “paper” or “real,” e.g. depreciation on delivery vehicles is usually at least 50% real; the trucks do deteriorate and will need replacing.)
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Walking the Road to the American Dream
What Buyers Want to Know When Looking to Purchase a Business
By JoAnn Lombardi, President ofVR Business Sales/Mergers & Acquisitions
People want to be their own boss. By far, this is the biggest reason people want to go into business ownership. Some may be frustrated in their current job or position. Others may not enjoy their current boss or employer, while others feel that their abilities are not being used properly or efficiently.
Surprisingly, money is not the first reason; not because it isn’t important, but it may not be the primary issue. Once a person decides to go into business for him or herself, he or she has to explore the options. Starting a business is one option, but there is a lot of risk for failure. Most people choose to buy an existing business because the risk is not nearly as high – established brand and customer base, existing inventory, place of operations, etc.
There are some key questions a buyer wants answers to, once the decision to purchase an existing business has been made. Below are some main questions that the seller should be prepared to respond to.
How Much is the Down Payment? Most buyers are limited in the amount of cash they have for a down payment on a business. After all, if cash were not an issue, they would buy the business outright.
Will the Seller Finance the Sale of the Business? It can be difficult to finance the sale of a business. If the seller isn’t willing, he or she must be willing to find a buyer who is prepared to pay all cash. In many situations, this is very difficult for the buyer to pull off.
Why is the Seller Selling? This is a very important question. Buyers want assurance the reason is legitimate and not because of the business itself.
Will the Owner Stay and Train the New Owner? Many people buy a franchise or an existing business because of the assistance offered. A seller who is willing, at no cost, to stay and to help with the transition is a big plus.
How Much Income Can a New Owner Expect? A new owner has to be able to pay the bills – personally and professionally. Just as important as the income is the seller’s ability to substantiate it with financial statements and tax returns.
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Explaining the Build-up Method
byShawn Hyde, CBA, CVA, CMEA, BCA, ECA, Canyon Valuations, LLC
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The Build-up method is one of the most commonly used techniques, for estimating the risk rate applicable to the valuation of a privately held business. As business appraisers, we know where to get the data to provide the Risk-free rate, the Equity risk premium, the Size premium, and all about what goes into the selected Specific company risk premium (SCRP). I know we all love the SCRP!
But…when one of our readers asks us, “what do all these different rates mean and how do they apply to the valuation of my business?”
Here is how I answer that question:
“The value of a business is equal to its expected future earnings divided by the risk of achieving those earnings. On the one hand, we have our forecast of expected future earnings, now we just need to figure out what the hypothetical, willing, and the able buyer might expect and a hypothetical, willing, and the able seller might accept.”
“To do that we can start with what investors in publicly traded markets are seeing for the various investments they are buying because those are trackable and documented. Let’s assume we have an investor, who has $100,000 to invest in …’ something’. If our investor is happy with a risk-free investment, such as the US Treasury bonds, well, we can look up what the rate is for those as of our effective date, so that is easy. But the Risk-free rate is only a couple of percent, typically. It is likely that our hypothetical investor would be expecting a higher return on their investment than just that 2.5 to 5% a year. Therefore, let’s add to that the overall equity risk premium for the S&P 500 as if that were a portfolio that one could invest in. Again, that is a rate that we can look up and reference for the year prior to our effective date. But, many investors tend to believe that the smaller the business is, the more risky it is. And the subject business we are appraising is not equivalent to the operating risk of the S&P 500 as a whole anyway. We can look up and select one of the various size premiums that are calculated, in order to add that to our rate of return we are going to use it to determine the fair market value of the subject ownership interest in the subject privately held business. Which will give us the overall rate of return we are looking for, right? A risk-free rate, plus the equity risk premium, plus the size premium, and we are done?”
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3 Reasons to Trust Search Funds More Than You Might Think
In the lower middle market, you’ll hear many bankers and business brokers assert that search funds are lowball bidders without any form of committed capital. It’s a very black-and-white point of view, and it’s wrong. The reality is far more nuanced. So before you remove “search funds” when you’re building out your “buyer list”, here are things to consider:
1 – Many search funds are capitalized by dedicated investment pools of capital that aren’t all that different from a PE firm. The same institutional investors that back private equity firms are also investing in search funds. So, if you’re thinking that search funds are fly-by-night operations, think again. They have the same level of backing as some of the most well-respected firms in the industry.
2 – Because a successful search fund acquisition can be highly lucrative, they attract some very talented first-time and veteran business operators. The cream of the crop is going into search fund investing because they see it as an opportunity to strike it big. If you’re working with a talented search fund operator, you can be sure they know what they’re doing.
3 – Search funds have an advantage with certain seller types because of the nature of the buyer. They present the seller with a clear choice of who is going to step in and run their business. That can resonate versus a faceless deal team at a private equity firm. For some sellers, that personal touch makes all the difference.
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Nursery – Garden Center includes 9 acres – of buildings
for Sale in North Dallas Area, TX
Full-service nursery & Garden Center in business in the same location for 43 years. The nursery sells all plant and landscaping products including perennials, blooming annual flowers and shrubs, native evergreen shrubbery, blooming trees, shade trees, and citrus trees, as well as tropical plants. They also sell a huge selection of summer vegetables and herbs.
The nursery also sells a full selection of soils, mulch, and amendments, as well as potting and planting soils. There is a large selection of pottery and decorative garden supplies. They also offer sprinkler system parts and sell to many professional irrigators as clients.
This is a business that is relatively easy to learn and manage. Of course, some knowledge of the product is beneficial, but not necessary in order to continue managing the business successfully. One of the owners is willing to remain in place for extended employment if the new owner desires, or only a short tenure for training to ensure a smooth and successful transition.
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VR Office in Wyomissing, PA Sold a Live-In Non-Medical Home Support Services Business
With a validated business model that was successful for sixteen years, the founding owners were able to convey their profitable model to the buyer who demonstrated the care and compassion required for ongoing success. As a privately owned company requiring no franchise or royalty fees and controlling all business operations and profits, expanding the services throughout the State of Pennsylvania and other regions can be accomplished. Continuing growth is based upon the service model of connecting highly qualified non-medical caregivers to provide 24/7 live-in care services to consumers living in their private residences or independent retirement communities at affordable price points. The 24/7 live-in model provides continuity and consistency of care for consumers, and it is much more cost-effective than 24/7 hourly home care services. Planning retirement and looking forward to enjoying the fruits of their labor, of utmost importance was the new owner maintaining the stellar reputation developed over sixteen years with both clients and caregivers.
Congratulations to David Bowman for your successful closing.
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Thinking of selling your business or looking for an established
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VR is The Only Remaining Founding Firm of The International Business Brokers Association ("IBBA").
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