In deciding how much to pay for a business, buyers consider a number of factors that are considered more or less important depending upon the needs of the specific buyer. While matching a business with the right buyer requires business savvy and skillful negotiation, there are certain concerns voiced by buyers that we at Business Appraisal Consultants continue to hear:

WILL THE SELLER HELP WITH FINANCING? Time after time, we find the terms to be more important than the stated price. The overriding importance of terms can be traced to at least two factors:

Typically, the potential buyer has neither the capital nor the borrowing power to pay the entire price in cash. If he did, he would probably be looking for a larger business! The willingness of the seller to "carry the paper" comforts the buyer by helping to assure him of the seller's confidence in the future of the business. In addition, a buyer may be less anxious about parting with their cash when the seller remains motivated to express their confidence in the ability of the new owners among both current and potential customers. DOES THE BUSINESS THROW-OFF ENOUGH CASH TO ALLOW THE BUYER A REASONABLE WAGE? While buyers often recognize that income must be sacrificed until any note is fully repaid, most require that the business allow a salary that provides them with a living wage. As a general rule, the buyer with more money wants both a larger business and a higher wage: but the buyer of even the smallest business typically needs at least some money to live.

IS CASH FLOW ADEQUATE TO PROVIDE NEEDED REPLACEMENT OF EQUIPMENT? An unfortunate fact of life is that aging equipment must be maintained, repaired and eventually replaced. While often viewed as part of "discretionary income," the element of cash flow known as depreciation must generally be reinvested to keep from cannibalizing business assets. In most cases, depreciation generated funds must be used to replace at least some equipment before a business is fully paid for. When the capital stock must be immediately replaced or expanded, a buyer may reduce the offering price to offset the needed capital expenditures.

HOW LONG WILL IT TAKE TO FULLY PAY FOR THE BUSINESS? For small businesses, buyers want to pay for the business within a reasonable period, typically three to seven years. Real estate, commonly viewed as an item separate from the business, can sometimes be financed through a long term lease. In other cases, the real estate may be sold to another party or made available to the buyer in the form of a lease.

HOW LONG WILL IT TAKE THE BUYER TO LEARN THE BUSINESS? As a general rule, one can expect a broader market for a business that is easier to learn and more easily transferred. One should not be surprised to find that buyers often expect sellers to remain with the business until the "tricks of the trade" have been passed on.

WHAT ARE THE FIRM'S FUTURE PROSPECTS? While future prospects are often "driven" by proven earnings, buyers are apt to pay more for a growing business in a growing industry that has been able to carve its own market niche. When the future is clouded and operating problems have emerged, it is more difficult to convince buyers to pay for "blue sky." However, a firm with a well developed business plan may stand out in the minds of a prospective buyer and be given more consideration than the great majority of firms that do not have such plan.

Although some buyers have been known in some cases to be swayed by the prospects for turnaround, most buyers looking for a turnaround candidate are only willing to pay a fraction of hard asset value.

CAN ANY GOODWILL REALLY BE TRANSFERRED? While there is often intangible value to a "turn key" operation with a trained and assembled workforce, payment for goodwill usually requires that the buyer be convinced that a high level of profits will continue after the business is sold. Often, the value placed by a buyer on such goodwill is tempered by the knowledge that, for the goodwill to survive, it must continually be "fed" (with the buyer's money).