Caution Small Business Owners - be wary of companies that want
to value and help you sell your business,
for an up-front “valuation” fee.

By Ron Johnson, CBI, M&AMI, Fellow of the IBBA

Over the years there has been a constant stream of firms that entice small business owners with a one-day “seminar” on preparing your business for sale. This is usually no more than a one-day sales pitch to get business owners to pay for “valuations” of their company, and frequently a promise (or contract) to send you “buyers” for your company. Advantages? You pay a lower “commission” on the sale of your company, but sometimes that commission is based on their “appraised value” and not the actual sale price of your company. Be cautious - the valuations I have seen have been significantly overinflated (2-3 times the value), so that (1) you feel they have really done a great job because your company is worth so much, and (2) if you should sell your company to one of their “buyers” you can end up paying 15%-20% of the “sale” price, because most likely your business  will not sell for the value they placed on the business, but you pay a commission on their “appraised value.” And, should you find a buyer willing to pay a highly inflated price, chances are you will either end up with the company back in your hands in a year or two and in a very poor condition, or you’ll end up in a very lengthy and costly lawsuit, or both. Over the years, these valuations and services have ranged from $750 to $45,000, depending on the company, and also how much they think they can get from you. Also, as told to us by business owners that have been involved in these rackets, the “buyers” that they were provided usually had no interest in their types of business, or were hundreds to thousands of miles away and had no intentions of moving.

Things to help you avoid these sharks:

1. Check to make sure the company is licensed to sell a business in California. A California real estate license is required for any “third party” that markets and/or assists in negotiating the sale of a business, except for stock sales above $7 million. Marketing includes any advertising. You can easily check them out for a license at http://www2.dre.ca.gov/publicasp/pplinfo.asp. Both the company and its representatives need licenses.
   
   
2. Ask for references. Calling just two or three past clients is quick and easy. Chances are they will not have references for you to call, or will be very elusive about this. The references should be relatively nearby, and at least in the same state. They should also be able to provide a long list of satisfied clients.
   
   
3. Be concerned if they are from out-of-state, or don’t have a brick-and-mortar office in your area.
   
   
4. Don’t fall for the line “we are nationwide, and have buyers from all over looking to relocate to your area.” That may happen 1 in a 1,000 times, unless maybe you are in the Las Vegas or Phoenix areas. Also, nowadays all business brokers and intermediaries advertise nationwide due to the proliferation of internet websites that we list businesses on.
   
   
5. Visit their website - do they give you names, phone numbers and addresses of their company and agents. Today every reputable business broker and/or appraiser has a website extolling their professionalism and their credentials, and will show references and complete contact information, and frequently have profiles of their firms’ associates.
   
   
6. California has very strict realestate laws pertaining to any “advance fees” - be concerned if the fee is to be paid before their “product” is handed to you in final form, and also if the fee is “credited” to the final success fee/commission due upon sale of your company.
   
   
7. Valuations should include at least two Market Approaches (comparable “done deals”) from organizations such as the Institute of Business Appraisers (IBA), Pratt’s Stats, or BizComps. Valuations should also include a number of Income Approaches, which is where some multiple of “earnings” are used, and may also include “market” value of fixed assets and inventories.
   
   
8. Very general guidelines for business values: (1) earnings multipliers: 2-4 times your total pretax compensation (net profit plus your salary, plus unnecessary or extraordinary one-time business expenses); (2) revenue multipliers: 30%-60% of annual revenue/sales (however, this can really vary with type of industry). Extremely few businesses sell for close to annual earnings (but some do).
   
   
9. Adjustments to earnings (“recasting”) should only be made to expense lines existing on the Income Statement (P&L). You cannot add “charitable contributions” back to income, if they are not on your business expense ledger. Likewise, you cannot “add back” an “industry average owners compensation” unless you have also expensed that same amount. Don’t laugh, I have seen both of these.
   
   
10. Ask if they are members of the IBBA (International Business Brokers Association) or CABB (California Association of Business Brokers), or other quality professional associations. Memberships in good professional organizations can be indicators (but not a guarantee) of competency and ethics.