Having a business for sale can mean many things, more than people think. How does one trade value compare to another and how do you get there? Because there are many types of businesses for many different industries, it stands to reason that there are numerous ways to approach the process of finding value.
There are 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 to consider because each and every business will have variations in what adds value to the business, and some of these differences are substantial.
First we must identify the type of sale: sale of shares or sale of assets. A stock sale is the sale of shares in the company; the buyer is buying the company based on the value of its shares, which represents everything in the business: earning power, equipment, goodwill, liabilities, etc. In an asset sale, the buyer purchases the assets and capital of the business that allow him to make a profit, but does not necessarily assume any liabilities with the purchase. Most small businesses for sale are sold as an “asset sale.”
Our question, when selling or buying a company, is this: what are the assets considered to arrive at an exact value? Here we will see some of the most common.
1. FF and E: this abbreviation stands for furniture, accessories and equipment. These are the tangible assets that the business uses to operate and make money. All companies (with some exceptions) will have a certain amount of FF&E. The value of these can vary greatly, but in most cases the value is included in the value determined by income.
2. Leases: The lease is the lease agreement between the property owner and the company that rents the property. The agreed rented space usually goes with the sale of the business. This can be a significant value, especially if a below-market rate is currently being charged and the lessor is obligated to continue on current terms.
3. Contractual rights: many companies 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 deals, and when someone buys a business, they are buying the rights to these deals.
4. Licenses: In certain commercial 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 buying the license from the business or the license from the individual. Often times, the buyer will require access or availability of the license as a contingent element of the sale.
5. Goodwill: Goodwill is the earnings of a business beyond the fair market performance of its net tangible assets. In other words, anything the company earns in excess of its identifiable assets is considered “goodwill” income, where there is a synergy of all assets together. This can be tricky. Most business owners assume they have goodwill in their business, but goodwill is not always positive; there are things like “negative” goodwill. If the company earns less than the sum total of its identifiable assets, there is negative goodwill.
6. Trade secrets: some companies are about secrets. The reason why the business is in operation may be due to a trade secret, some aspect of a product or service that distinguishes it and gives it a market. In a commercial purchase, these secrets have value and go with the sale.
7. Trade names, phone numbers, websites and domain names: Some companies generate business simply by their name and identifiable aspects. If that changed, so would earnings. So when buying a business, the buyer will need those names and numbers to continue in business. Of course, in some cases these things would not matter at all, and that is why each one must be addressed individually.
8. Works in Progress – A construction company may have a multi-million dollar job in progress at the time of sale, which can take months to complete. In a case like this, the buyer would have to continue in the private work that the company was doing; for money and reputation. This is considered work in progress and has value and is therefore considered an asset and is part of the sale.
9. Business records: the history of a business detailed in documents and spreadsheets must necessarily be part of the sale of the business. The new owner can use the records to identify progress, track sales increase or decrease, adjust expenses and depreciation rates, and more. When someone buys a business, they are buying the current operation and all the details that led to it.
10. Real estate: the property of the seller in which the company develops its activity is inherent to the operation and, therefore, to the value. There are times when the new buyer needs to relocate the business to purchase it, but more often the property is considered an important aspect of business value, especially if there is equipment attached to the property and buildings suitable specifically for the business.
When a professional appraiser, business broker, or business owner values a business for sale, it is considered more than just income. Assets, the economic values used by the business to generate income and profits, are weighed heavily in determining the value of the business. And they must be taken into account to understand what a “business for sale” really means to a buyer.