When evaluating an offer to buy your business, one of the key questions should be, “What’s included in the price?” An offer may sound good on the surface, but until you know what the buyer intends to purchase, it’s impossible to tell. In an ideal situation, a seller may receive multiple offers.
With so many negotiable variables, it can be very difficult to compare them and determine which offer is truly the best one. An experienced M&A professional can guide the offer process, break down the details of each offer, and outline the pros and cons of each so the seller can make an informed decision.
While each business sale is unique there are general guidelines to keep in mind when evaluating offers.
Any fixed assets such as equipment, furniture, computers, and vehicles used to run the business should be included in the price. Patents, trademarks and service marks (referred to as intangibles) should also be included. Inventory is always included, however, it’s important that the value is correct, which is usually the lower of cost or fair market value. Sellers should make sure all inventory is current and can be used or sold by a new owner to maximize their price.
Working capital, the current assets minus the current liabilities, is a negotiable item. These items include inventory, normalized cash in the business, accounts receivable, prepaid expenses, accounts payable and accrued liabilities. Notes receivable, excess cash, securities and notes payable are usually excluded.
Real estate can complicate a valuation and the sale so it’s important to know the fair market value and whether it’s part of the price offered. The owner’s vehicle may be included in the sale, but most of the time it does not add value to the business and should be excluded from the sale.
Phantom assets are items that may not have a physical component or show up on the balance sheet, but they contribute to the value of the business and should be considered when evaluating an offer. An offer may assign value to phantom assets such as a great management team, a diversified customer base, long-term customers or vendor contracts, recurring revenues, strong delivery systems or an excellent reputation.
Evaluating even one offer, let alone multiple offers, can be daunting. Your M&A advisor can break down the details and guide you through the process so you can confidently make your final decision.
For more information or advice on a business for sale, contact O’Keeffe & O’Malley at 913.648.0185.