This month, I'll work toward dispelling myths associated with business acquisitions.
The first myth is that furniture, fixtures, equipment, inventory and other assets are always “add-ons” to business evaluations.
This is not true. The real value of a business is based on its cash flow; assets simply are the tools required to generate the businesses sales and earnings.
Assets and inventory are considered when a business is being sold in less-than-ideal conditions, such as when the company has no profits or cash flow. Problems that arise in establishing the worth of those items, and typically, buyers aren't interested in those businesses because the seller already has proven that the company hasn't made profit.
A second myth is that sellers should always press for an “all cash deal.” Buyers will interpret this stipulation as a lack of confidence in the business, the buyers chance to succeed or both which can seriously diminish the chances for the deal.
A seller who wants to proceed in this manner should take a hard look at the benefits associated with the seller financing.
First, it increases the pool of prospective buyers. Secondly, sellers will not have to discount their sales price. Also, the interest of the seller financed the deal can be substantial.
Another benefit is due to low interest rates, sellers can get a higher rate from the buyer then they may from a traditional financial institution.
And finally, with an installment purchase agreement, instead of being taxed in the year the sale occurs, the sellers capital gains is taxed over the life of the note.
Another myth is that a seller needs to keep all his skeletons neatly tucked away in a closet. Wrong! We've all heard about Rite Aid, Enron, Global Crossing, etc. and so have buyers.
If sellers want to keep buyers moving forward, they must show the respect by being open, honest and accurate about all things, both good and bad. A lack of full disclosure at time of sale may only delay the inevitable full disclosure in a court of law.
Another myth often believed by sellers is that if they set their price high, they can always drop it. When a buyer sees a seller come off their price, they often view it as a sign of weakness and leverage to get an upper hand in the negotiating process.
Buzz Harris, a Licensed Business Broker with The Liberty Group of Nevada, writes a recurring Voices column for the Northern Nevada Business Weekly. Contact him at 775-825-3948 or via email at BHarris@TheLibertyGroupofNevada.com.