There are 2 new major twists to selling your biz in 2010: Pricing and Financing. And what could be so new about those 2 issues in selling and buying a business?
First, let’s look at pricing your biz. Forget about the old 36-month average model of earnings (EBITDA) to determine a price. Better to take a Snapshot of last year and this year. So in the 36-month example you may demonstrate annual earnings of $500K, $425K, and $250K for average annual earnings of $391K, and stake your price for your biz there. But in the Snapshot model you look at 2009 and 2010,which hovers at $250K…and that there’s your price, amigo.
When you seek counsel on pricing your biz, the biz broker can shoot straight or tell you what you want to hear. If you want to hear that he will take and market your biz for the $391K based on the old model, while that sounds sweet to the ear, it won’t bode well for the stomach as time goes by with no closure. Better to listen to the hard reality of the adviser telling you the new rules of baseline pricing.
So how can the seller know for sure if he priced his biz right? According to Chicago Biz Broker Dominic Rinaldi, if you put the Snapshot price out there, his experience has been that it can attract several interested parties, which could invite a bidding result, and could command a premium for your biz, and assurance the price was indeed right.
Mr. Rinaldi further indicates that since there are so many negotiables, there are ways to manage the down side of pricing to get the highest value. Which brings us to the other issue of financing.
You already know it’s particularly difficult to get funding from banks or anyone to buy a biz. What remains the same is assuming a 30% down payment on a biz. Banks funded the majority of the remainder until this recession. In 2010, savvy sellers are funding the remainder. While a bank might advertise a 5% interest, those loans are rare to materialize. Sellers’ terms will vary, but look for an interest rate range of 6-9% for a 5-year term. Certainly there’s a significant vested interest in qualifying your buyer, and back-end risk on helping to insure their success. Preventative measures can be taken to manage those risks and should be points of discussion with a carefully selected biz broker.