Hot Business List -- March 2011

Below you will find the current “hot” business list courtesy of data from Businesses For Sale (www.businessesforsale.com). We asked Businesses For Sale for a monthly ranking of business types based on the number of “hits” on their site. This ranking is not based on the actual sale of businesses.

We are simply trying to provide a glimpse at what buyers are looking at now. We felt that displaying businesses sold would reflect the past rather than the future.

Of the top ten listed below, eight are food and drink type businesses. I include C-Stores as they do sell food and drink. Keep this in mind, that today’s buyer, perhaps more than ever, is a first time-buyer and wants something he or she is comfortable and familiar with. Interestingly, looking at data from many years ago, the top sellers look very familiar.

E-Commerce is also right up there. This category obviously includes a lot of different type of businesses. Since I believe that main street business brokerage is still a numbers business (and I don’t mean necessarily financial numbers). The more fast food businesses the office has listed, the more they have to show a prospecting buyer. Buyers who want something in the easy food line might buy a bagel shop, a sandwich shop or similar business.

Businessesforsale.com is an English company and very good site to place your listings with. But, they break down their lists by country. So, the lists below are based on activity in the U.S.

More from Len Krick in the All-Important Stock vs Asset Issue

I delivered my 200,000 pages of documents plus 2,757 e-files by the deadline, last Friday, to the State of Nevada in response to their subpoena. I also decided to “kiss their ring” and amend my listing agreement on another deal I am doing right now (set to close this Friday or a week from today, to a consulting agreement. This will cost me $52,500 in foregone fee, but I can’t slap the State securities Division in the face right now with another stock sale, now that I am under investigation. I have included the amendment language below that we are doing  to satisfy the State (we hope), until a permanent solution can be found. Note that the State specifically DOES NOT recognize the November 2006 “CBI” No-Action Letter.

I am now soliciting all my friends with the following e-mail. If we can find commercial deals that converted to stock deals, then the State will have to take on the commercial real estate people as well. This would be good for business brokers. Here’s what I am sending out. Note that this is the message to my friends, so they already know who I am, etc.:

Len Krick's Proposal

by Len Krick

Gentlemen:

Obviously I am trying to figure out how to defend myself in the asset sale conversion cases I face. Notwithstanding attaining the ultimate goal of having the SEC address the issue formally through either an exemption or special license, or both, I have an idea to propose for your consideration:

Here are the points:

1. The SEC is asking for actual cases where business brokers were harmed, etc. Based on Mike and John’s e-mails, it appears that they believe that the CBI No-Action Letter should provide sufficient protection.

2. The SEC still believes that any deal where the Seller receives a promissory note, secured by the assets or stock of the business, also should require the Broker to have a securities license. If the SEC actually “ruled” on that, it would have a disastrous effect on the profession of business brokerage, and thousands of business owners would not be able to sell their businesses.

3. I have an action (MSI Case) that alleges, in U.S. District Court, that I am in violation with Nevada State Securities Law.

4. I also am under investigation by the Nevada State Securities Division for possible violation with Nevada State Securities Law. As a result of that investigation, the State is going to uncover at least 8-10 additional transactions that, for different reasons, ended up as a stock sale.

5. Both of these actions are based on “State” law, not Federal.

Records Subpoenaed -- Len Krick's Nightmare Continues

Comment from Tom West:
The issues between the state of Nevada and Len Krick continues. So far, as Len points out, the federal government has not become involved – yet.

So far, this civil case only claims I violated Nevada State Securities laws. It could very easily be expanded, though, to claim I violated Federal laws as well. We are sort of waiting for that shoe to drop.

At this point, the Nevada State Securities has only subpoenaed all my records (which I am reproducing right now); they have not yet indicted me. Obviously, we are hoping that they decide not to proceed. The question is, would I be willing to sign a “Consent Decree,” promising not to do any of these deals in the future? The answer is “How can I promise that when I didn’t create the problem in the first place and am powerless to prevent it in the future? But, my question to you is: Other than showing the SEC that state regulators are starting to deal with this problem on their own, what relevance does the subpoena have to the SEC?

Incidentally, producing confidential records for the State is an issue in and of itself.

IBBA Questionnaire

by Tom West

A recent email from the International Business Brokers Association (IBBA) had a short questionnaire on why deals fell apart. The results were as follows:

My comments:

Unreasonable Seller Expectations
When I initially saw the first reason listed for why deals fell apart, I thought it was a misprint: Sellers had unreasonable expectations? In fact, I was so concerned that I went back to the email and sure enough it was seller expectations.

Broker Licensing Options

by Jack R Sanders, CBA, CBI, CMEA, CM&AA

Today, Business Brokers/Intermediaries have a whole world of new options for legally securing commissions. In the past, most brokers have been licensed as Real Estate Salesman/Brokers in the state they were in or not licensed at all if their state did not require licensing or if there was no real estate involved. That would include a lease to be transferred to the buyer. The lease was a favorite way of requiring brokers to be licensed and to pay a DRE (Department of Real Estate) fee. The place where being properly licensed really becomes an issue is in court when you are trying to collect your fee. That is where the rubber really meets the road.

Not much attention was paid to the business being transferred if it became a stock transaction instead of an asset sale under the Uniform Commercial Code. Attorneys can handle stock transactions but may try to reduce your fee to justify theirs. With the advent of the new FINRA (FINANCIAL INDUSTRY REGULATORY AUTHORITY) Series 79 license there is now an option for handling stock, multi-state, partial interest, equity financing and a whole variety of other transactions we were prohibited from doing as business brokers. Also, currently underway with a big push from several organizations, is another type of license that would permit transactions similar to those described in the SEC CBI (Country Business, Inc) No-Action letter. It has been nicknamed a BrokerLite license and is still under negotiation. It would require limited background check and almost no testing. Opinions vary as to the success of this license being approved.

For the purposes of this discussion, I will limit further comments to the Series 79 license and what is required to obtain one.

Franchise Rules of Thumb -- R to Z

compiled by Tom West

View Franchise Rules of Thumb for franchises from Red Robin to Zoo Health Club.

View the complete Franchise Rules of Thumb list from A to Z on our web site.

More detailed franchise information can be found in our annual Business Reference Guide or on our continually updated online version of the guide -- BRG Online.
 

Franchise Rules of Thumb -- L to Q

compiled by Tom West

View Franchise Rules of Thumb for franchises from La Estancia to Quizno's Classic Subs.

Tomorrow's posting will complete the list of Franchise Rules of Thumb.

Franchise Rules of Thumb -- D to K

compiled by Tom West

View Franchise Rules of Thumb for franchises from Dairy Queen to Kuman Math & Reading Centers. 

More detailed franchise information can be found in our annual Business Reference Guide or on our continually updated online version of the guide -- BRG Online.

Franchise Rules of Thumb -- A to C

compiled by Tom West

View Franchise Rules of Thumb for franchises from AAMCO Transmission to Curves for Women. 

Have you had a franchise resale within the past 12 months?  You can share information about your franchise resale by completing the form at http://bbpinc.com/franchise-resale-form.aspx.

Franchise Rules of Thumb -- Introduction

compiled by Tom West

Throughout this week we will be posting a list of almost 200 franchises with a “quick” rule of thumb, or range, usually expressed as a percentage of sales. For many of the franchises, the information is based on quite a few actual sales; others may have been based on just a few; and in some cases just one where we felt it was appropriate. They can be a good starting point for pricing the business.

Many of the franchises are well known while others are very new with just several units. By the time this information gets published in our print guide, some of the franchises may have folded, sold or merged. We try to keep our information as up-to-date as possible. We could use your help. To contribute to our ever-growing list, just go to our online form, complete the requested information, and click "Save." Also, if you find that a franchise has disappeared or merged, etc, please let us know by emailing tom@bbpinc.com. Obviously the big changes such as Mail Boxes to UPS Store will be caught by us or by our researchers (hopefully).

Keep in mind that rules of thumb are just that. Every business is different and rules of thumb will never take the place of a business valuation or even an opinion of value. But, they will give you a quick ballpark idea of what the business might sell for everything else being equal. A rule of thumb will tell you whether a seller is in the ballpark when he or she tells you what they think their business is worth or what they want to sell it for.

Valuing Assets: Part 4

by George D. Abraham

DETERMINING CONDITIONS

It should be noted that in determining conditions, the appearance of the particular item is important. However, the equipment must be judged on mechanical and electrical working conditions and not just on appearance. Paint, lubrication, and general clean up should be part of general maintenance and should not be used to cover up defective equipment.

The physical condition, deterioration, depreciation or state of repair is a major factor in values. Loss of value due to curable or incurable depreciation is a consideration of market value.

Assuming the current owner paid for leasehold improvements and the local lease market is not providing spaces built to the tenant’s specifications, use the following schedules:

A. Long Lived Improvements (10 to 25 year life)
Walls, electrical wiring and plumbing can be valued at the original cost of installation with no deduction for depreciation. (Inflation rates will compensate for depreciation).

Valuing Assets: Part 3

by George D. Abraham

DEFINITIONS OF CONDITIONS

Care must be taken in assignments of condition ratings to accurately reflect the impact on value

EXCELLENT

New/near new or practically new mechanical condition, extremely low hours of use, no defects, and may still be under warranty.

VERY GOOD

Exceptionally good condition. May have just recently been completely overhauled or rebuilt with new or near new materials and/or has had such limited use that no repairs or worn part replacements are necessary. Very low hours of use.

GOOD

In complete 100% operating condition. No known or obvious mechanical defects but may have some minor worn parts that will need repair or replacement in the near future. May have high hours of use but no defects are obvious.

Valuing Assets: Part 2

by George D. Abraham

When discussing hard assets, there are various categories such as Furniture, Fixtures and Equipment, Vehicles or rolling stock, inventory (both for resale and parts for everyday repairs), Leasehold improvements, as well as Licenses, Patents and Trademarks. Each category of assets has to be analyzed individually and some research is required. Keep in mind that in addition to the fair market value of each item, you may have to arrive at a “Value in Use” of the equipment. “Value in Use” is defined as: “The value of an economic good to its owner/user is based on the production (privacies in income; utility or amenity form) of the economic good to a specific individual. This is a subjective value however, and may not necessarily represent market value.”

When valuing Furniture, Fixtures and Equipment, several things can happen when trying to research the values. For instance, you will usually encounter two scenarios that stand out when calling used equipment dealers, sometimes auctioneers (although you are mainly looking for fair market value, in some cases auction value is the market), and trade association magazine classified ads as well as the owners own estimate and owners of similar businesses; one is that everyone seems to know the value of the various pieces of equipment or that no one can give you a straight answer until they see the equipment and its condition.

You can adjust the equipment on the Balance Sheet by adding to or deducting from depreciation to reflect the fair market value of the assets. This gives you an economic adjustment that is based on fair market value rather than a taxed based value as set forth by IRS schedules that are usually only for tax purposes and probably do not reflect the true value of the equipment.

Valuing Assets: Part 1

by George D. Abraham

Most individuals involved in selling and or appraisal of complete companies usually underestimate the importance of the fair market value of the assets of the business. Many appraisers and intermediaries merely rely on “Book Value” or the owner’s best estimate and even an arbitrary discount or premium based on the type of asset involved. The theory of not really doing a value analysis on the assets is mainly derived by the assumption that the business is worth what the market will pay, or in other words its “Fair Market Value” and that the assets are merely the basis for producing the income stream. It is also a common philosophy that because goodwill is the difference between the assets and the company’s fair market value, that if you are slightly off on the value of the assets, the only factor influenced is that the company will show more or less intangible value, but the fair market value of the complete business is still the same.

If you look into the accepted approaches that are used to value businesses, several aspects begin to cloud the above scenario. For instance, appraisers do, and should use historical as well as projected financial analysis to normalize discretionary net profit. Correctly done, the cost of new equipment to handle future increases in revenues for the business in the projected years and a deduction for true (sometimes called economic depreciation or a capital reserve) depreciation for historical years to arrive at a true earnings picture of the company. If the costs of the assets are off, keep in mind that at a capitalization rate of 25%, every one thousand dollars of discretionary net profit can equal 4 times that amount when capitalizing the income, thereby having a drastic impact on the overall value of the company.

Another aspect that one must consider is that many of the calculations in the various approaches take into consideration the value of the assets. Those that are not directly impacted by methodology involving the assets are still derived from capitalization of the income stream, and as stated above can result in some drastic differences in value.

Why Don’t More Franchisors Disclose...? Part 2: The Options

by Ed Teixeira

Yesterday's blog post discussed Item 19 disclosures for franchisors including some of the benefits. Today's post will explore other options that enable a franchisor to provide important financial data to prospects.

The Options:

Under the amended FTC Rule franchisors can provide prospective franchisees operating cost estimates, such as for labor, ingredients and products, so long as this information is not presented as a percentage of gross revenues. If it is, then an Item 19 disclosure must be made. Additionally, a franchisor can provide the prospective franchisee with a price list for its product line. If the franchisor does provide prospective franchisees with cost and expense information, the information must be consistent with the information contained in Items 5, 6, and 7 of its FDD. Cost information in combination with additional FDD disclosures can enable a franchise candidate to construct financial projections.

In addition, a franchisor can make an Item 19 disclosure for revenue only. By providing revenue figures a prospective franchisee has a basis to develop a break even and cash flow projection.
Some franchisors list franchisee revenue without identifying the franchisee by name or location. This is a rather simple process that a franchisor can follow.

When a franchisor refuses to provide the most basic financial information to prospective franchisees, some consider this to be a red flag. It creates the perception of negative financial results from their franchise network.