Buying a Marginally Profitable Business

 

Why Buy a Business That is Not Profitable

Buying a Marginally Profitable Business

I couldn’t decide what to call this blog post so I left both titles. You’ll probably only remember the one that relates to your situation anyway. 

Have you been saying to yourself, “I want to own my own profitable business but I don’t have much money for a down payment”?

Dreaming of starting your own business, being your own boss? Afraid of the big sacrifice, the unknown that would include keeping your job? After all, starting a business is taking a big risk and you realize that you probably will be working without pay for a long time!

Well don’t give up hope just open your mind to considering some alternative possibilities.

Consider buying a marginally profitable or even currently unprofitable business. Sounds silly I know, but think it through. An existing business that has a history and assets would probably be much less difficult to borrow money for than a new start up. Having a known revenue stream from day one is a huge benefit.

Proving to yourself and a lender that you have the skills, experience and abilities to turn a marginal business into a viable, healthy profitable business is key. Your ability to make improvements in a certain period of time may be your biggest challenge.

A business that is not profitable at the moment, may still have considerable economic value. It may in fact be worth quite a bit of money to the right type of business buyer.

Marginally profitable and unprofitable businesses are bought and sold every day!

Who Buys Marginally Profitable Businesses?

Investor groups or larger companies looking to grow through acquisitions are typical types of buyers looking to capitalize on marginally profitable businesses. Such buyers are usually interested in the acquired company’s longer-term potential. They generally look beyond its immediate profit numbers.

Other types of buyers on the smaller scale are generally savvy business people and upper management professionals. These people have the skills and experience but lack the liquid capital needed to acquire larger or more profitable companies.

How Do Buyers Determine the Value of Marginally Profitable Businesses?

Business Planning
Business Planning, determining the value of a marginally profitable business.

Different business valuation models and methods are commonly used by these groups for unprofitable businesses. Market Comparisons to similar established companies are excellent ways to estimate what a marginally profitable business would be worth.

Highly profitable businesses will bring much higher multiples of revenue than  marginally profitable businesses. This much larger price tag position the businesses beyond the reach of many potential buyers.

Marginally profitable businesses generally have a much lower multiple resulting in a lower price point. The main thing to consider is, a marginally profitable business may still carry a much lower cost and risk than a new business start up. It is likely easier to get financing on an existing business than borrowing for a new business start up.

If I had to make a choice I would buy a marginally profitable business before starting a new business every time. Based on my own experiences, it is a better way to go!

I use the following methods to value a marginally profitable business that I’m interested in buying:
• Business selling price to gross revenues or net sales.
• Business selling price to business assets, such as total assets or tangible assets.
• Business selling price to book or market value of business equity.

I like brokering technology company deals. So, selling price to total assets is especially well suited for valuing a technology business that has both tangible and intangible assets. The intangible assets may include intellectual property, customer lists, valuable subscriptions and distribution rights, and the like.

If I am planning to re-capitalize a business or resell it to a well-funded buyer. The valuation multiples based on business revenues or asset base valuations are very useful.

In these situations using valuation multiples based on profitability, such as SDE (discretionary cash flow), EBITDA, or net income are not practical.

Income based valuation methods, are very well suited for valuing a business that is currently operating at a loss. Discounted Cashflow Method Valuations are valuations based on future income.

This is a well-known method that lets you calculate business value based on the company’s earnings forecast and risk assessment. Typical forecasts are done for 5 years, followed by the estimate of the business long-term (terminal) value.

Basing a business value on the long-term earnings outlook. All business valuations are forecasts, that is business value defined by the future business prospects. There is a number of things business people do that affect their business value.

A good example is a business owner who merges businesses that are losing money. The combined companies may enjoy advantages that drive profitability including: combining product lines, new markets, lower costs by combining operations, and much more.

A marginally profitable business can attract smart investors that bring not just money but considerable managerial skills to the table. These skilled managers may help the company develop new products and services, enter new markets, and turn their technology and know-how to profitable use.

Intelligent investors and managers may over time introduce operational changes that cut costs and improve efficiency. Often an excellent source of ideas is right under their noses disguised as long term employees.

Business Strategy
Business Strategy

So, when shopping to buy a business, I encourage you to not overlook a business that is marginally profitable or even currently operating in the red. This may be the best opportunity for you!

Press Release – Lee Grider joins Best Business Brokers

For Immediate Release

Best Business Brokers B3
912 349 0940
info@best-business-brokers.com
Savannah, Ga.

4.28.2014

Lee Grider joins Best Business Brokers

Lee comes to B3 as an associate business broker with a desire to grow his presence with business development in the Coastal Empire. He brings real estate experience as a Georgia Real Estate Broker, property investor, and business owner to partner with Dean Burnette. Lee, in addition to his qualifications brings integrity, high ethics, and the desire to listen from the heart. Lee strives to give the best customer service possible. Lee is actively involved in investment groups in the area and volunteers at prison ministry, KofC, Band of Brothers, Habitat and juvenile court. In the past Lee involved himself as HOA president, parish council president, Kairos ministry leader, and port ministry.

Lee comes to us from KY where he grew up on a farm, his father was a builder, and his family was involved in real estate as investors and Realtors. He attended the University of Kentucky, operated a store, and was in the airlines industry for thirty years.

A business broker is a professional dedicated to helping individuals and corporations navigate the business buying or selling process. Business brokers offer professional services in a knowledgeable, ethical and timely fashion. They provide information and resources to sellers and buyers, facilitate communication between the parties and coordinate the negotiations and closing processes to complete desired transactions.

Best Business Brokers, specializing in Manufacturing, Logistics and Technology related industries as well as industrial real estate.

Lee Grider, Business Broker, GA RE Broker 276734

lee@best-business-brokers.com

912-349-0940 x 4

Savannah GA Business Broker qualifies for Georgia Association of Business Brokers (GABB) Multi-Million Dollar Club.

SAVANNAH, Ga., Dec. 12, 2013  — Local Business Broker qualifies for Georgia Association of Business Brokers (GABB) Multi-Million Dollar Club.

Dean Burnette is a Business Broker and Licensed Real Estate Broker based in Savannah Georgia serving the Coastal and South Georgia area. He founded Best Business Brokers in 2009 after more than two decades of starting, buying and selling businesses. With roots in Southwest Louisiana and Georgia, Dean draws from his experiences as a business owner, previous buying and selling transactions, the International Business Broker Association (IBBA), and GABB. Dean has started, bought, sold owned and operated businesses since 1986.

Locally Dean is a member of the Real Estate Commercial Alliance (RCA) a subsidiary of the Savannah Area Board of Realtors (SABOR), he is the 2013-2014 President of the Savannah Small Business Chamber of Commerce,  he is a member of the Savannah Area Chamber of Commerce, The Savannah Folk Music Society and the Derenne Business Owners Association.

On a State level a member of the Georgia Association of Business Brokers (GABB) and the Georgia Association of Realtors (GAR). He is a member of the International Business Brokers Association (IBBA) and also a proud sponsor of the 2014 Georgia Logistics Summit.

Best Business Brokers represent owners of Georgia businesses, we help them determine the value of their business, create a marketing strategy, seek out and identify buyers and qualify them all while keeping the sale confidential from employees and customers. We focus on businesses with revenues between $1- and $30-million in the manufacturing, logistics, and technology industries.

There are many buyers who own businesses and recognize this as an opportune time to grow their revenues through the acquisition of a competitor or a strategic partner. There is also a large pool of business buyers today who have decided not to re-enter the work force, they want to control their own destiny by purchasing a Georgia business. Business Brokers are a significant part of Georgia’s economy as we provide business owners with the opportunity to sell and protect their retirement and, at the same time, bring new entrepreneurs into the economy as business owners or financial partners.

Dean is married to Dr Deborah Burnette, he has two children, three grandchildren, they enjoys traveling, playing music, kayaking, running and being in 4 parades a year on their float the “Santa Maria”.

More information about
http://www.smallbusinesschamber.org
http://www.savannahchamber.com
http://www.realtorscommercial.com
http://www.savannahboardofrealtors.com
http://www.savannahfolk.org
http://gabb.org

Homepage


GABB: http://www.gabb.org/

The Southeast is growing, a land of opportunities!

With an estimated 9,829,211 residents as of July 1, 2009, Georgia is the ninth most populated state located in the southeastern United States. Georgia is bordered on the south by Florida; on the east by the Atlantic Ocean and South Carolina; on the west by Alabama; and on the north by Tennessee and North Carolina. MapOfSavannahNow is the time to think about expanding your operations into the Savannah Area!

River Street Business Opportunity

Riverstreet View of the Talmadge Bridge
Riverstreet view of the Talmadge Bridge from the GA Power site

SOLD

So many people contact me looking for business opportunities in Downtown Savannah hoping and dreaming of the opportunity to enjoy the majestic character of this beautiful city. People tell me stories of how they came and visited their children at SCAD and fell in love with the area. How they would love the opportunity to live here if only they could find a business and be able to earn a living here. Some tell the story of when they were stationed nearby in the military and loved the area so much they knew they would come back some day. Others have come from Atlanta or some other inland location and after loosing their jobs in the big economical shake out of recent years have nothing to hold them back. They are coming to the coast and there is no place like Savannah GA!

I was pleased recently when I got a call from a local business man who has successfully operated a river street business for more than two decades. He has not only earned a living but started another successful business through the proceeds of this business. His words to me were, Dean I want to sell my river street store because my passion has shifted to my other business and I haven’t been involved as much I should have in my store. I have been fortunate and this is a good opportunity to share this special business with someone else.  I explained to him that this is a great time to sell and that there is the perfect buyer waiting for this opportunity!

A small confirmation of this came when I was reading an article in the Savannah Morning Newspaper from one of my favorite business columnists Bill Dawers. The article was entitled “West End of Savannah’s River Street waiting for rebirth”. Bill talks about some of the history of River Street and mentions Georgia Power’s Plant Riverside with its 3.79-acre tract is up for sale. With room for new construction on either side of the existing building it would be a good location for a couple of new hotels.  The article also mentions an additional 10,000 square feet of continuous commercial space in the 300 block of West River Street just east of the MLK intersection. And at the southwest corner of MLK and River Street there is almost 9,000 square feet.

A person who enjoys retail and a tourist environment will want to consider taking advantage of this very unique opportunity. A “flagship store operation” this retail store has not been just a store but a showroom of sorts for what is happening in the world of souvenirs, gifts and novelties.  This business has enjoyed a 24 year history of providing tee shirts, gifts and souvenirs on River Street in downtown Savannah, GA.  This tourist retail store not only offering Tee Shirts, gift items, they offer Beer by the drink and specialty cigars.  They have great lines of Pirate and St Patricks wear which sets them apart from the competition.  This business has prospered through all sales and economic cycles over the past 26 years.  The seller has had another business interest and has been pursuing it for several years and is selling due to interest in that business.

 If you have an interest in becoming a part of the beautiful River Street business community call or email me. Do it soon so you can be operating the business before March 2013, St Patricks days in savannah is the busiest time for River Street Merchants!
Dean Burnette
Business Broker
RE Broker License #335135
deaninsavannah@gmail.com
912-349-0940

SOLD

Due Diligence 101

Due Diligence for Buying a Business 101

 

Written by Alexander J. Davie

 

Buying a business is a high stakes matter.  What makes the process even more nerve-wracking is that a business is different from just about any other asset one can buy.  When someone purchases a piece of real estate, a car, or any other tangible product, a buyer usually knows what they are getting and can inspect the goods and has a chance to find hidden problems (or pay a specialist to find them).  A business, on the other hand, is largely intangible.  While some of the aspects of the business may be tangible, many are not.  The business will likely have receivables, inventory (both completed products and parts), intellectual property, and goodwill and reputation. Many of these assets may not have the value that the seller claims they have and may be difficult to value.  The business will also likely have liabilities like hidden debts and potential lawsuits.  Discovering the true extent of these liabilities is crucial in making sure the purchase of the business is worth pursuing.  Finally, there are many intangible considerations that go beyond just the company’s balance sheet.  How does the business operate as a whole?  Is its management team effective and will they stay involved after the change in ownership?  How are the relations between the business and its customers?

Because there are so many hidden traps in buying a business, purchasers will usually engage in due diligence on their target acquisition.  The main purposes behind due diligence are (1) verifying the information provided by the seller and (2) uncovering any material information that the seller hasn’t provided, either intentionally or unintentionally.  Unintentional omissions are actually quite frequent.  Buyers often discover potential legal liabilities of their target or asset impairments due to previous regulatory violations or poor legal work that the seller may not even be aware of.  Not performing proper due diligence can lead to surprises down the road that end up being far more expensive than the cost of doing due diligence upfront.

[Click on the author’s name for a link to the full article]

Business Valuation Myths

Myth I: Valuing a private business should only be done when the business is ready tobe sold or a lender requires a valuation as part of its due diligence process.

Although the business sales and lending processes generally require that valuations be completed, if these events represent the first time an owner has a valuation completed, then you can be sure critical business and estate planning issues have not been addressed. If the business is to have a life beyond that of its current owners, then effective planning for ownership transition requires a regular valuation of the business.

Myth II: Businesses in my industry always sell for two times annual revenue (the revenue multiple). So why should I pay someone to value my business?

The short answer is that data on selling prices indicate that revenue multiples within an industry are generally all over the lot. These rules of thumb used by business brokers, the individuals who often facilitate private business transactions, are median multiple values. The median value indicates that half of the revenue multiples are below the median value and half are above. Thus, the median value is just a convenient midpoint and does not represent the revenue multiple for any actual transaction. Unless the firm that is being valued is truly

Myth III: A local competitor sold his business for three times revenue six months ago. My business is worth at least this much!

Maybe yes and maybe no. What happened six months ago is not really relevant to what something is worth today. What your business is worth today depends on three factors: 1) how much cash it generates today; 2) expected growth in cash in the foreseeable future; and 3) the return buyers require on their investment in your business.

Myth IV: How much a business is worth depends on what the valuation is used for!

The value of a business is its fair market value (FMV). According to the Internal Revenue Service, the FMV is what a willing buyer will pay a willing seller when each is fully informed and under no pressure to act. While there may be a FMV range, the wider the assigned valuation range is, the less reliable is the valuation and the more likely it becomes that the valuation will face greater scrutiny from potential buyers or the IRS.

Myth V: Your business loses money, so it is not worth much.

Most private businesses appear to lose money. Appearances, however, are often misleading. Not long ago, a friend of mine was considering buying an auto parts business inCalifornia. The asking price was approximately $950,000 and, according to the firm’s tax return, it hardly made a profit. Like many businesses of this type, this business was generating a great deal of cash, but this cash was masquerading as legitimate expenses. One expense category really stood out—payments to officers. This payment included the owner’s wage of $80,000 per year and a bonus of $150,000 that the owner paid himself at the end of year. The $80,000 wage is what the business would have to pay a stranger to do the same job as the owner. This was a real expense. The $150,000, on the other hand, represents what finance people call a return to capital. It is the cash the business generated and it is this cash that determines the value of the business.

Excerpts from a SCORE article by Dr. Stanley J. Feldman, Chairman, Axiom Valuation Solutions and Associate Professor of Finance,BentleyCollege.

Press Release

Best Business Brokers President Dean Burnette

Earns Real Estate Brokers License

SAVANNAH, Ga. – Dean Burnette, president of Best Business Brokers, recently earned a real estate brokers license, adding to his credentials and better qualifying him to assist buyers and sellers of businesses by brokering the sale of industrial and commercial real estate throughout the region.

A licensed Business Broker, Burnette is a member of the Savannah Area Chamber of Commerce as well as the Savannah Small Business Chamber and other local business groups and organizations. He has more than two decades of experience as a business owner in the manufacturing, logistics, technology and financial industries and founded Best Business Brokers, the area’s leading independently-owned business brokerage.

Burnette has deep connections in the local business community, providing unsurpassed market knowledge and offering uncompromising integrity. His knowledge of area businesses and interaction with the community combine to make him an asset to business sellers and buyers.

Best Business Brokers specializes in the manufacturing, logistics and technology industries, offering unique expertise in these areas. The company has worked with buyers from across the country and around the world with an interest in investing in Savannah-area companies.

In Georgia, a real estate license is required to broker the sale of a business, even if a business occupies leased space. In addition to the education required to obtain a real estate license, most professionals have experience or complete courses in topics related to business brokerage.

Real estate brokers and sales agents must be licensed in Georgia. Prospective agents must pass a written test. The examination is more comprehensive for brokers than for agents and includes questions based on real estate transactions and laws affecting the sale of property. Individuals seeking a broker’s license in Georgia must complete between 60 and 90 hours of formal training and have three years of experience selling real estate.

ABOUT BEST BUSINESS BROKERS: Best Business Brokers, the area’s leading independently-owned business brokerage, excels at connecting businesses with qualified buyers. Under the leadership of licensed business broker Dean Burnette, Best Business Brokers has successfully listed and sold multi-million dollar companies as well as small businesses, treating every client with respect and offering the ultimate in confidentiality. For more information, visit www.best-business-brokers.com or call 912.349.0940.