| Oftentimes, business brokers are approached by | | | | Conversely, a service business with great |
| business owners who are thinking of selling a | | | | revenue and profit history but little in terms of |
| business that has little or no tangible assets. | | | | assets can be very attractive to a large pool of |
| Because there are minimal physical assets | | | | business buyers. Such a business is usually |
| associated with the business, owners may think | | | | examined by buyers that understand that they |
| that the value of the business is very little. | | | | are buying "future earnings" of the business and |
| This is a common misconception in the | | | | they generally want to understand how the |
| marketplace - that the value of a business is | | | | profitability of the company will continue even |
| somehow equal to the market value of its | | | | after they take over as the new owners. |
| tangible assets. The reality is that the most critical | | | | As such, buyers of these types of businesses |
| piece of a business's valuation is its ability to | | | | ask important questions about the company, such |
| produce future earnings. This article will quickly | | | | as: |
| examine some of the factors of business value | | | | - What is the future potential of the business? |
| for a company that is profitable but has very little | | | | - How 'clean' are the financials? |
| hard 'assets'. | | | | - How differentiated or propriety is the service |
| Selling such a company is very possible but it | | | | the business offers? |
| would be in your best interests as a business | | | | - Is there a 'key person' involved in the business? |
| owner to work with a business broker who is | | | | If that person left would the business suffer? |
| knowledgeable about business valuation principles | | | | - What is the market and competition like? Is |
| and can properly articulate the company value to | | | | anything expected to change? |
| prospective buyers. | | | | The point is that a business buyer who |
| How to Justify Value when Selling a Business | | | | understands the principles of business valuation |
| There is an old saying in finance that "cash is king." | | | | would understand that a business with great |
| This is especially true in business valuation and | | | | earnings and a strong outlook (but little hard |
| when selling a business. Buyers in the market | | | | assets) can still be a great acquisition. |
| ultimately are looking for a business that will | | | | As a seller of such a business, it would be |
| produce a stream of cashflow to them going | | | | beneficial to you to work with an experienced |
| forward. | | | | accountant or business broker to properly |
| Often, business owners believe that a business | | | | understand how to price the business that has |
| with a large pool of physical assets but minimal | | | | little hard asset value. |
| earnings is marketable based on the "asset value." | | | | Financing may be challenging though |
| This is a dangerous assumption to make. | | | | Although a business for sale with minimal hard |
| Investors in the marketplace typically are not | | | | assets may be a good investment opportunity, |
| attracted to a business for sale that has much in | | | | there are some challenges on the financing side. |
| the way of equipment and assets but does not | | | | Canadian banks typically look at securing business |
| have the earnings to support a valuation. Again, | | | | loans with collateral. Oftentimes, the value of |
| "cash is king." Having physical assets in a company | | | | business goodwill (intangible assets) is not |
| is certainly great but without the historic profit (or | | | | considered in the loan evaluation. Ensure that you |
| more importantly, potential future profit) then | | | | have the resources to purchase such a business. |
| such a business would be difficult to sell. | | | | |