Businesses listed on business brokerage sites often follow a specific format. It can be great to have this consistency—and benefit from the apples-to-apples comparisons brokers try to set up—but when you aren't familiar with the terms, the listings can be overwhelming. In this article, you’ll learn how to evaluate a business by deciphering the terms they use, the figures they report, and the meanings of some commonly used phrases.
Let's start with an example of a common business listing:
Electrical contractor business for sale in Central Michigan
- Asking price: $320,000
- Gross revenue: $554,000
- Cash flow: $130,000
- EBITDA: $100,000
- Down payment: $256,000
- FF&E included: $30,000
- Inventory: $40,000
- Real estate: $300,000 (optional additional cost)
- Financing: Yes
- Distressed: No
- Location: Confidential; Central Michigan
- Primary business category: Electrical Contractor
- Franchise: No
- Established date: 2010
- Real estate: Owned
- Building square footage: 2,000
- Lease expense: N/A
- Home-based: No
- Relocatable: Yes
- Employees: 6
- Is management staying on: No
- Required license(s): Electrical
For the last ten years, this single-owner electrical contractor has provided quality services to residential and commercial clients in the Central Michigan area. The owner has built a solid, loyal customer base, resulting in a high percentage of repeat customers. The firm has an A+ rating with the BBB.
There is competition in the area, but this company has an outstanding local reputation for providing exceptional service to its residential and commercial customers.
There is potential for growth for a buyer who is interested in expanding service to other target markets. The company employs a part-time salesperson and sets a minimal budget for advertising. Additional sales and marketing expenditures would likely increase the business’s total sales.
Support and Training
The owner is willing to offer up to six months of training and transition support.
Reason for Selling
What can you learn from this listing? Let's take it on one piece at a time.
The parts of the listing
The listing title gives a brief, general description of the business that’s for sale. Sometimes, it also provides the location of the business. In the example above, Electrical Contractor Business For Sale in Central Michigan, the title does both.
This section will provide you with some high-level information about the price and cash flows of the business. Listings will always include the price, but many sellers choose to withhold some of the other high-level financials until interested buyers specifically request this information.
The terms in this section are important:
The asking price is the amount of money you’ll need to come up with to purchase the business.
In this example, the asking price is $320,000. A buyer would need to provide this total in cash or through a financing arrangement to complete an acquisition of this business.
Gross revenue is the total amount of money the business received in the most recent year or reporting period before expenses.
In our example, the business made $554,000 before paying wages, salaries, interest obligations, rent, and other costs of running the business.
Cash flow refers to the amount of cash and cash equivalents that enter and exit the business. It explains whether the business generates enough cash to pay its debt obligations and taxes.
Our sample business reports a positive cash flow of $130,000. Relative to the revenue of $554,000, there is a healthy profit margin (23%).
A quick note here: Good profit margins vary by industry. You'll need to research your industry’s net profit margins to determine whether a business you’re considering is performing well or struggling. However, in many industries, a 10% net profit margin is fair; 20% is good.
You should also know that there are a few ways brokers and sellers calculate cash flow. Rather than taking their stated cash flow at face value, you should request their financials and make your own estimates. An accountant can help you with this task.
Would you like to connect with an accountant? Click the Connect button below to get started:
EBITDA is earnings before interest, taxes, depreciation, and amortization. It’s similar to cash flow, but it treats the owner’s salary as an expense.
In our sample business, the EBITDA was $100,000. The difference between the EBITDA and the cash flow is the current owner’s salary, which, at your discretion, could become your salary as the new owner of the business.
Down payment refers to money you’ll pay the seller upon the sale of the business. In many cases, buyers are asked to pay the full purchase price upfront; however, a smaller upfront amount may be possible if the seller is willing to provide seller financing.
In our sample business, the down payment required is $256,000. This signals that the seller is willing to provide up to $64,000 in seller financing.
FF&E explains the dollar value of the movable furniture, fixtures, and equipment offered in the sale of the business.
In our example, the seller is offering $30,000 of FFE, which may include desks, chairs, computers, machinery, or other office items. Prospective buyers should verify this value in the due diligence process by getting a third-party appraisal.
Would you like to connect with an experienced valuation specialist? Click the Connect button below to get started:
Our sample business states that their inventory is worth $40,000. This value should be verified in the due diligence process by a third-party appraisal.
Real estate refers to the physical buildings and land that’s owned and available for sale. Many businesses, including those that rent office space, won’t include real estate in their sale.
This sample business includes mentions $300,000 of real estate, but the listing states that this is an optional additional cost. When the real estate is listed as “optional,” it usually means that the seller is open to retaining ownership of the building and letting you lease the space from them for an additional fee.
|Terms tend to be more favorable for real estate loans than loans for an operating business. SBA loans, which are often used to purchase operational businesses, usually require repayment over a 10-year period, while real estate loans can often be attained for 25 years or more. Because of this, many buyers choose to finance their new business and its real estate separately.|
Financing is a term many brokers use to designate whether the seller is open to providing what’s known as “seller financing,” or a loan for the purchase of the business. Normally, seller financing is offered to buyers who have good credit and can meet the stipulations the seller provides.
The owner of the business in our example is open to providing seller financing. Prospective buyers may be interested in this opportunity because seller financing would reduce the amount of cash and financing they’d have to attain from other sources to cover the acquisition costs.
Distressed is a term that describes businesses that are struggling to cover their liabilities, are in default, or are working through restructuring or bankruptcy proceedings. Sometimes, distressed businesses can be good investments, but many prospective buyers prefer to focus on businesses that are not in distress.
Our sample business claims that it is not distressed, which means it isn’t struggling or at risk of default.
This section gives some basic details of the business. Most listings will include the business’s location, its employee count, and the year it was established. Some listings, like our example, will provide more information. You might learn whether the business is a franchise or home-based, whether the business can (or must) be relocated, whether the management team will continue on after the transfer, and whether any licenses will be required of the owner to operate the business.
Details of the business
The final section of the listing usually includes the “pitch” the seller or broker would like to make about the business. Often in paragraph form, the listing might highlight the benefits of the business and provide an optimistic summary of its competition and growth opportunities. You’ll need to read the summary with a discerning eye and commit to making your own judgments about the state of the business, its positioning in the market, and its potential for growth through the due diligence process.
This section often includes two other key elements that you should pay close attention to: the support and training that’s offered after the sale of the business and the reason for the sale of the business.
Support and training are valued by many business buyers because they grant the buyer access to the seller for questions, advice, and support after the sale. It’s often a good sign when support and training are offered because they indicate that the seller cares about the business's longevity and isn’t trying to run away from a problem he or she knows is about to emerge.
Reason for selling is also important. Reasons like health concerns or retirement indicate that the seller needs or chooses to exit the business for personal reasons, not reasons pertaining to the health of the business. Another reason, like “pursuing other interests,” can be a red flag that indicates the business isn’t performing as well as the seller would like or that the seller would like to exit the business before a known problem or event occurs.
This guide should help you make sense of most of the listings you’ll encounter on business marketplace sites. However, you may also consider casting a wider net and looking at businesses that aren’t currently for sale. Read Buying a Business That Is Not for Sale to learn how to find under-the-radar business opportunities that may suit your goals and interests.
Log into your owner’s portal for articles and advice that’ll help you through every step of the pre- and post-acquisition process.