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BUYING A SMALL BUSINESS

What Business Buyers and Sellers Need to Know
 

After fizzling out during the recession, the business-for-sale market is booming. If you're jumping in, consider this advice.

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In June, Soledad Manaay listed her in-home elderly care business, Care on Call, with a broker. Within three months, she received 10 offers for the profitable Belmont, California, company, which had 50 employees and $2.5 million in annual sales. She sold the seven-year-old business in November for $1.3 million, just below her asking price of $1.5 million. "I was surprised that so many people were interested," says Manaay, who plans to launch a nutritional supplement business next. "If you can show profitability, there are a lot of buyers."

The economic recovery may not be creating jobs, but it has sparked a surge in sales of small businesses. The number of deals tracked by the marketplace BizBuySell.com rose to 1,685 in the third quarter of 2013, a 42 percent jump from the same period a year earlier. That's the third straight quarter in which sales have jumped significantly. Restaurants, retail operations, and service businesses are experiencing the most growth. "After four years of depressed selling and buying activity, the markets are coming back," says Curtis Kroeker, group general manager at BizBuySell.com.

What's Driving the Trend:

Now that sales are improving, many baby boomers who hunkered down during the recession are eager to sell their companies and retire. Meanwhile, banks are loosening up the purse strings: In the past two years, 13 of the nation's largest banks increased lending by $17 billion, according to the U.S. Small Business Administration. Last year also marked the third-highest year of lending to date by the SBA. If you're thinking about getting in on the action, keep the following tips in mind.

Tips for Sellers:

1. Think back; plan ahead. Don't expect to snag prerecession offers unless you have outperformed the market. Buyers will value your company on the basis of average sales for the past three to four years. Ideally, your company should have at least one year of sustainable growth before going on the market, says Mike Maak, president of NorthEast Business Advisors in Rochester, Massachusetts. You could sweeten the deal by helping finance the sale and agreeing to stay on as a consultant.

2. Evaluate your needs. Check your needs against your company's valuation. If you're hoping to fund your retirement with the proceeds of a business sale, keep in mind that the Bush-era tax cuts expired in late 2012, resulting in a tax increase (to 39.6 percent) on the highest earners. That means you might not take home as much money as you would have if you sold your business just two years ago. Once again, advance planning is key: Calculate how much you will need to retire, or satisfy another financial need, and compare that with your company's valuation.

Tips for Buyers:

1. Act soon. There are plenty of good deals available for buyers. But as company financials continue to improve, the gap between asking prices and sale prices is narrowing, says Kroeker of BizBuySell.com. One key metric to consider when valuing a business is cash flow, which should cover any loan payments and capital equipment purchases, in addition to your desired salary.

2. Don't get cocky. With the economy on the upswing, it might be tempting to underestimate the amount of cash you will need on reserve when buying a business, warns Roger Murphy, CEO of Murphy Business & Financial, a business brokerage in Clearwater, Florida. "Most buyers think they're going to do better than the sellers in growing the business," he says. "But things may change, and you may have setbacks."

 

IMAGE: salty_soul/Flickr
From the February 2014 issue of Inc. magazine




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