Friday, November 30, 2012

How to price a business


How to price a business, or how to sell a business, may present a problem that is difficult to correct unless you take a certain step beforehand.  Here's what led up to this post:

I just spent an interesting afternoon chatting with John Coto, a highly-recommended business broker in New England.  We were discussing the future sale of one of my sidelines (especially how to price the business)  and John brought up a subject I’d not even thought about before.

“Between 90 and 95 percent of all the sellers come to me with the same problem,” he said.

Can you guess what that problem is?

The problem is how to prove to the prospective buyer what the true income of the business is, when the seller has been cooking the books for years. This is especially true when the business, such as a Laundromat, a restaurant, or a bar, has a largely cash income. “Some of these guys,” says John, “are skimming up to half the profits. I tell them I can’t help them get paid for what they do not report.

Are you planning to sell your business some day?

If so, why not start declaring the true income?  In such a case, the buyer may not believe the tax returns and might falsely assume you are making even more money, and will therefore be quite anxious to buy!

Another advantage is that you will sleep better at night. Trust me on this one!

2 comments:

  1. Be careful if you do buy a so called legitimage business. I remember years ago reading how someone got scammed. They saw an ad somewhere for a 'restaurant' or something in a desolate mall for sale. The 'seller' had papers and information and it looked legitimage, the 'business' wasn't operational at the moment. Long story short, the guy paid for a business that didn't exist- the scammer sold him the brooklyn bridge, basically- the 'restaurant' wasn't even his to sell! It's also like some person who got taken by a 'property owner' who convinced the guy (cheap price too, of course!) that he didn't need a title search, just cash to buy the hunting cabin and land. And, months later the real owner came upon the 'new owner' who was tearing the cabin down, and the buyer found out that he was sold property that the scammer lied and said was his to sell.

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  2. Jack,
    If someone took your advice from another thread and started working for themselves to protect their paystub data from being sold by the company for which they work (and other egregious privacy/trust violations), let's say they wanted to buy someone's sideline business, for example.

    How is one wanting to quit a job to buy such a business to pay for it without borrowing? And is it common to find such successful businesses owner-financed? And what is it that prospective business buyers typically look at for proof of the business's profitability? Previous tax returns provided by the seller? I think Warren Buffet is famous for being skilled at reading SEC filings to decide whether to buy a business. What if there are no tax returns on the business, what other typical proof is there of the business's profitability? Most all private-sector businesses do not fit relevant tax law definitions of "trade or business" ("performance of the functions of a public office" in the Internal Revenue Code, Section 7701) and thus have no need of filing 1099s and other IRS information returns (even the instructions on the 1099 form front page make it clear that the form is inappropriate for use by those not in a "trade or business", i.e. inappropriate for those in the private sector). Have you written any books that talk about how to find and buy a successful small business? Or written much on how to come up with a small business where one can work for himself or herself?

    BJ White

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