|
Fact Sheet
regarding
Small
Business Succession or Continuation
Small business overview
·
98% of America’s 9.5 million
businesses employ less than 100 people.
·
90% employ less than 20.
·
1.5 million Americans operate home
based businesses.
·
Small business accounts for all
growth of the GNP
·
Responsible for creation of
essentially all new jobs
·
Less than 1% are Public companies
·
160,000 new businesses are created
monthly
Succession expectations
·
50% of business owners plan to pass
their business on to family.
·
10% anticipate selling to a
competitor
·
30% plan to sell to employees
·
10% expect to sell to outsiders
Succession realities
·
15% pass to a second generation,
and 5% of the second generation businesses pass on to the third.
·
10% sold to competitors
·
5% sold to employees
·
10% sold to outsiders
·
Balance are closed and liquidated
·
A recent survey of more than 5,000
businesses owners revealed that 76% closed their doors in order to “move on”
-- only 24% of the businesses succeeded the owner or were sold
·
100,000 go out of business monthly
Why selling a business is difficult and different
·
Confidentiality must be maintained
(Don’t let anyone know the business is for sale, but sell it quickly)
·
Buyers don’t know exactly what
they are looking for
·
No one really knows what a business
is worth but everyone has an opinion
·
Banks are reluctant to provide
acquisition funding
·
Future profitability is totally
dependent upon new owner, past performance cannot predict future results
·
Most private business owners strive
to minimize profits making “real earnings” difficult to discern.
·
Usual buy/sell rules cannot be
applied when selling a business
·
A highly charged emotional
atmosphere complicates the purchase and sale of smaller businesses
·
The buy or sell decision requires a
careful balancing of personal as well as financial considerations
·
Business buyers and sellers are
unfamiliar with the unique process employed to safely transfer ownership
·
Buyers, sellers, and their advisors
fail to recognize the real motivation of buying or selling and instead focus
solely on financial matters
·
There are very few buyers for a
business that has to be sold
Fact Sheet
regarding
Small Business
Valuation
Most business owners wonder what their businesses are worth
and financially savvy professionals seldom agree -- Why?
·
Sales are private and, unlike real estate transactions, not
recorded -- therefore scant comparable sale data is available
·
Rumored sale results are often inflated or exaggerated
·
Public accounts of actual sales are usually not analogous
·
Best known valuation methodologies are inappropriate for
estimating the value of a small business
·
Financial information is of secondary importance when assessing
value
·
Little is known of the different buyers in the marketplace --
different buyers pay different prices.
·
The impact that restricted financing has upon value and
transaction structuring is overlooked
·
The fact that a business’s Fair Market Value is not necessarily
its Fair Cash Value is not understood
·
Relationship of motivation and value is not easily measured
What multiple of earnings is appropriate when estimating the
value of a small business?
·
Multiples currently in use range from a low of 1 to a high of 15
-- but a multiple of what?
·
Unlike the public company sector where earnings are defined as
after tax, a standard definition of earnings for private companies does not
exist -- instead an array of “true earnings” computations has evolved
·
Some buyers will discount earnings entirely and focus solely on
the value of assets to be transferred
Are there value “rules of thumb” that can be used on
specific types of businesses?
·
Yes, and they are sometimes accurate -- however, most “rules of
thumb are dumb” and should not be relied upon in serious considerations
·
Hundreds of rules of thumb have evolved to fill the void caused by
the lack of comparable sales data
For additional information
contact:
Ted Burbank, FCBI
Parker-Nelson Publishing
508 794-1200
|