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
DelGallo.com Real Estate Website:
https://delgallo.com/LENDELGALLOREALESTATE.htmlLeonard 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
FL Managing Broker: Park Place Realty Network, LLC
2500 W. Lake Mary Blvd, ste 220
Lake Mary, FL. 32746
Del Gallo Financial Services, LLC is a registered investment advisor and licensed insurance agency.
Leonard J. Del Gallo Jr., is an investment advisor representative of Del Gallo Financial Services, LLC and a licensed insurance agent.
Leonard Joseph Del Gallo Jr., a licensed Real Estate Broker Associate and independent contractor who helps clients with INVESTMENT, COMMERCIAL, & RESIDENTIAL property. Managing Brokers - Berkshire Hathaway HomeServices N.E. Properties in CT and Park Place Realty Network, LLC in FL - Berkshire Hathaway HomeServices and Berkshire's related companies & Park Place Realty Network, LLC are not affiliated with Del Gallo Financial Services, LLC. Visit: www.AVONCTREALESTATEAGENT.COM
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