• As the Listing Broker, you represent the Seller, do I need someone to represent me?
  
• What is the difference between owner’s discretionary cash flow, owner benefit, seller’s discretionary cash flow, adjusted EBITDA, normalized earnings and other similar descriptions used as representing the earnings of a business?
  
• How are businesses valued? I see a considerable difference in asking prices on businesses.
  
• I am not sure what kind of business I want. Can you help me?
  
• Why do I need to fill out a Confidential Financial Statement and Buyer Profile just to find out about the business?
  
• Why do I have to sign a Confidentiality Agreement or Non-Disclosure Agreement?
  

Q: What is the difference between owner’s discretionary cash flow, owner benefit, seller’s discretionary cash flow, adjusted EBITDA, normalized earnings and other similar descriptions used as representing the earnings of a business?
A: All of the above are terms typically used in small business sales, sometimes interchangeably. These representations, most often referred to as ODCF or owner’s discretionary cash flow are made up of the following taken from the income statement or the tax return:

The Pre-Tax NET income of the business plus 1) the owner’s salary, 2) the payroll taxes for the owner’s salary, 3) an adjustment for any family employees to make their salary equal to a fair market wage that one would replace them with, 4) the payroll taxes for this amount for the family employee, if any, 5) any personal benefits that the owner is expensing through the business, 6) adjustments for obvious expenses that are out of the norm for an industry, 7) one time or extraordinary or non-recurring expenses, 8) interest expense to bring it back to a cash basis, 9) depreciation and amortization, non-cash expenses. As you see this amount represents what an owner/operator working full time in the business will have available to pay any debt that they incur in purchasing the business and what they would have available to take out of the business in salary and /or benefits as well as any return on investment for the down payment and capital expenditures.

Q: How are businesses valued? I see a considerable difference in asking prices on businesses.
A: The asking price may not represent an actual valuation. There are numerous ways to price and to value businesses from simple formulas and rules of thumb to complex calculations and computer programs. Of course there are the three classic approaches to value: cost, market and replacement values. It would be fair to say that businesses listed for sale would likely mirror the same strategy as those of any real estate agent or broker and varies by the broker’s mode of operation for listing business. Many times the seller’s desire or demand for a specific asking price is a predominant factor in the asking price on a small business. Many businesses are priced by using a market approach, using similar businesses with comparable data that have previously sold, to arrive at a price that seems logical and that the seller will agree to.

Q: I am not sure what kind of business I want. Can you help me?
A: Yes. If you will share information with the broker in the following areas, they will be able to help you narrow down the businesses that are in an affordable price range and from there you can continue to narrow your choices. The minimal information that is needed is contained in our Buyer Profile and Confidential Financial Statement. By answering the questions and filling out these forms completely and honestly your broker will be able to search and define the businesses that most closely fit your criteria.

Q: Why do I need to fill out a Confidential Financial Statement and Buyer Profile just to find out about the business? A: The listing broker has a responsibility to the seller to make sure all potential buyers are qualified to buy the subject business. By carefully analyzing the information you provide, a broker can determine if a potential buyer has the liquidity and net worth to potentially buy the business. Furthermore the broker can take this information and search to see if there are other businesses available that could also be a potential fit based on your criteria.

Q: Why do I have to sign a Confidentiality Agreement or Non-Disclosure Agreement?
A: Businesses, unlike residential and commercial real estate sales, are handled on a confidential basis, in a highly discrete manner to protect the seller’s business and livelihood. Generally, the employees of the business, the customers, suppliers and the lenders do not know the business is for sale. Awareness of a pending sale of the business that would create a possible change in these relationships, such as a key employee leaving the business because they felt that they no longer had job security or a supplier deciding to change their channel of distribution or terms, could affect the value of the business and even seriously disrupt the operation. Furthermore, in regard to information flowing through the broker, the broker is obliged by their contract with the seller to retain control so that confidentiality is not breached. Financial and other information provided to you as a prospective buyer is of a private nature and is not to be distributed to anyone other than your financial advisor, accountant and legal advisors. These advisors must be made aware that you are under a confidentiality agreement and must agree to abide by the terms of non-disclosure as well.