DELGALLO.com Wealth Management Essentials - Considering Selling Your Commercial Property, Investment Property, or Business?
By LEONARD J. DEL GALLO JR., M.S., MPASsm, CFP®
(www.DELGALLO.COM) Del Gallo Financial Services, LLC
Wealth Management is not a simple process. Many business owners lose sleep over the decision to sell their business, investment property, and/or their commercial property. Is the best decision to transfer these investments to their family members? Is the best decision to sell both the real estate and business together or split the property from the functioning business entity? The decision really depends on the type of business and how comfortable the owner feels that they will receive the appropriate amount of compensation if they are selling due to retirement, changing occupations, or being ill. There may be capital gains or capital losses that can impact the final value that is received from the business or property, with the potential of depreciation recapture impacting the bottom line from a sale. A close examination must be done of the business and property to determine appropriate valuation. At times, the business cannot function without the real estate property due to a required location or the need of the contents or machinery to run the business.
Examining the books and accounting records of the business will be an initial step. All financial statements (Income Statement, Balance Sheet, Cash flow statement) should be updated by the CPA. Ratios can then be created to compare your business to similar businesses in the same industry, which provides incite as to how the business is performing. A sophisticated buyer may see areas within the financial statements that can be improved upon which can add potential value to them if they are seeking to purchase a business.
How many accounts are there, is there traveling to service the accounts, average sales amount from each account? Is there any product waste from spoiling? How long will it take for a purchaser to recoup their purchase price? What is the cap rate (net operating income/market value) for the property or the return on investment (ROI) for the business? Most buyers will have a required rate of return on their investment or a specific CAP rate in mind for property, which will impact negotiations. What is the company’s past, current, and forecasted growth rate? How marketable is the business, commercial or investment property?
There are many approaches to valuing a business. A seller may visit a website to get an idea of value. Valuadder.com, is one website that provides an approach that uses three process, an asset approach, market comp. approach, and an income approach. The asset approach looks at assets versus liabilities of the business. The market comp approach looks at comparable sales to determine value. The income approach has two methods one of which is the capital valuation method that looks at earnings divided by a cap rate or required return. The second income approach is using the discount valuation approach which considers earnings forecasted while considering the terminal value of the business which is then reviewed to determine the present value in today’s dollars. A seller should seek advice from their CPA and or tax advisor to determine the best way to proceed in determining value.
Comparing business ratios to other companies can provide valuation multiples in a number of categories. For example, from comparable business sales, you may be able to determine what your business is worth based on its’ recent revenues, net income, discretionary cash flow, EBITDA (Earnings before interest, depreciation, taxes, amortization), total assets or book value, etc. In some industries businesses are sold by some multiple times sales or book value. An owner may use the price to gross revenue multiple to determine a market based value for their business. Identify which methods you would like to use or are more common in your industry and then provide verification of your calculations.
Equipment costs can be a major expense for any business. It will be important to gather maintenance and repair records for any major piece of equipment. Include all vehicles, refrigeration equipment, or any other major pieces of machinery or equipment that is used for the business. It may be possible to sell some equipment or machinery separately at a higher value. It may make sense to sell the real estate and business as separate pieces to maximize value. Prepare records of the age for all major pieces of equipment, and note any brand names that may have reputable track records. Hire a mechanic, refrigeration technician, and/or appraiser to examine each machine and piece of equipment to determine its’ value.
If there are employees, will they be staying on after the sale? Are there any contracts or special arrangements with any employees? How are the benefits structured at the company? Are there any key employees within the company? What are the costs to maintain the staff or costs to terminate any of the employees? If there is a need to relocate the business how will that impact the staff?
Determine how much inventory must be kept on hand at any given time and if any orders are able to be directly shipped from distributers. What is the average amount of time for the business to turn over its entire inventory? What is the inventory age cycle during the calendar year? For example, a cheese manufacturer may turn over their inventory every 2-4 weeks due to it being perishable. Make sure all the inventory is categorized so it can be easily identified. If the business sells a specific product are there any records which would show the level of customer satisfaction in the product or service of the business.
When selling any business, commercial property, or investment property make sure you have the potential buyer sign a nondisclosure agreement attesting that they will not use any of the information gathered to start a competing business or discuss your information with outside parties not named in the agreement. The privacy of your investments is very important. A potential buyer of a business may want to watch the business operations for a few days. The buyer may want to accompany drivers on delivery routes, work in the warehouse receiving product, and go with the sales force when they deliver samples, or listen to service calls. The buyer may ask the seller many questions to ensure the business is a good fit and this should be welcomed to you as the seller.
Many deals fall through due to the inability to attain proper financing. As the seller you may want to consider if you, the business owner, would be willing to finance the sale to a potential buyer. The willingness to finance a buyer can be an indicator of how strongly the owner believes in the financial integrity of the business. It is always important to seek legal counsel and talk with your CPA firm. The owner has every right to ask the potential buyer to show proof that they have the ability to purchase the business or property. Many buyers can seek help from the SBA (Small business Administration) for loans and a local bank or commercial bank is always a good place to start when seeking financing. To finance a business’ inventory purchases, mention to a potential buyers they may be able to talk with the suppliers about terms and special arrangements. A buyer may want to ask each supplier if they would extend credit and allow them to open an account. If suppliers are unwilling to do so, make allowances for cash purchases of inventory when seeking other financing methods.
Business owners may seek an appraisal or valuation expert to come into the business to determine the value. It may be expensive and the owner needs to determine if it will be worth the cost. The true value of any business or property is what the buyer wants to or is willing to pay, with exceptions. Property and businesses that are financed may need to meet certain standards and valuation metrics for the loan to be disbursed by the lender. It is important to have timelines in any drafted sales agreement, which should be discussed with your attorney.
Below you will find some of the designations for appraisers:
1.Business valuation designation of Accredited Senior Appraiser (ASA)
2.The Institute of Business Appraisers whose principal accreditation is the Certified Business Appraiser (CBA) designation
3.The American Institute of Certified Public Accountants (AICPA) which grants the Accredited in Business Valuation (ABV) designation only to CPAs
4.The National Association of Certified Valuation Analysts (NACVA) which offers the Certified Valuation Analyst (CVA) credential, which requires a CPA license.
Below you will find a few websites which may be able to post your business for sale:
BizBuySell.com. , BizQuest.com, BusinessBroker.net, BusinessForSale.com, BusinessMart.com, DealStream.com (Formerly MergerNetwork), FranchiseGator
The commercial or investment real estate should be appraised or at a minimum have a competitive market analysis performed. A real estate agent will be able to provide metrics to measure the value of your property. There are many ways to value a property depending on the type and use. An agent with experience may use some of these types of analysis to determine value; cost approach, sales comparison approach, income capitalization approach, value per gross rent multiplier, value per door, cost per rentable square foot, assessment based methods, and/or other property specific techniques.
The process of wealth planning is a complicated process that needs to be carefully managed. Please contact Len Del Gallo Jr. for more information if you are considering selling your business, home, investment property, or commercial property. My clients’ goals are the top priority.
Any questions please contact Del Gallo Financial Services, LLC by visiting our website at https://delgallo.com/. DELGALLO.com also has important disclosures and information. Leonard Del Gallo Jr., does not verify the integrity or accuracy of any website links mentioned in this article or works cited. This research commentary is intended to educate business owners so they may gain an introduction to a difficult planning topic and is not intended for any other purpose. Articles created by Len Del Gallo Jr., may not be copied or used without written permission from Len Del Gallo Jr.. Del Gallo Financial Services, LLC and its’ representatives do not provide tax or legal advice. Please consult your tax advisor or attorney for guidance on such matters and before implementing any strategies and/or updates to your planning. Del Gallo Financial Services, LLC is a Registered Investment Advisor and Licensed Insurance Agency. Leonard Del Gallo Jr. is also a licensed Broker with Managing Broker Berkshire Hathaway HomeServices NE and this real estate relationship is not affiliated with Del Gallo Financial Services, LLC. Leonard Del Gallo has real estate certifications in Commercial and Investment real Estate as well as Short sales and Foreclosure. Leonard Del Gallo Jr., M.S. MPAS(sm), CFP®, CIREC, SFR®
Works Cited - References
1.How much is my business worth? Dan Caplinger. 6/16/17. www.fools.com
2. How to Buy a Cheese Distributorship. Devra Gartenstein. Smallbusiness.chron.com
3. Millcreekcommercial.com. www.millcreekcommercial.com/depreciation-recapture/
4. Pitchbook.com
5. Six Commercial Real Estate Valuation Methods. Rafael Rosenkranz. 2/12/20. www.firstrepublic.com
6. Smallbiztrends.com. smallbiztrends.com/2016/05/business-valuation-calculators.html
7. Three Business approaches. Valuadder.com
8. What is a business valuation and how do I calculate it? Ellen Chang. 12/5/2018. Thestreet.com
Leonard J. Del Gallo Jr., Broker Associate in Connecticut & Florida
CT Managing Broker: Berkshire Hathaway HomeServices N.E. Properties
www.bhhsneproperties.com
Office: 172 West Main Street
Avon, Ct. 06001
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