Tips and Definitions
This final part is devoted to some business definitions, some business tricks and overcoming the usual arguments of buying am existing small business.
The Usual Suspects:
1. "Starting a business from scratch is less expensive than buying an existing business."
This is most common argument. I personally have started several business and purchased several business. My believe is that in the long run I spent more time and money on the startups.
Consider just the cost of advertising to bring a startup to the same level of income as an existing business.
Add to this the time you must spend, not to mention the loss of earnings, setting up vendors, finding a location, negotiating a lease, hiring and training employees.
This is just the beginning of the hundreds of details you will need to tend to that are already in place with an existing business.
2. "Very few sellers sell a successful business."
Folks this is just not true. Business are sold all the time for a variety of reasons. Many are sold for poor health. retirement, death, burn-out and partnership breakup. You, the buyer, must just look carefully at the reasons for the sale. Don't take anyone's word.
3. "Seller may become a competitor"
Solution: Get a covenant not to compete. Non-competitive covenants are designed to prevent sellers from participating in a competitive business for a period of time and within a radius of specified miles.
These are the three major concerns. There are other arguments that will be discussed at length in a future report.
A Few Definitions
"Adjusted Operating Income (AOI)" -- Used in a cash-flow valuation and recasting of profit and loss statements.
"Confidentiality Agreement" -- The promise that you'll use the information only to make a decision about buying said business.
"Due Diligence" -- The due diligence is the time when you’ll have access to the company’s books and records.
"Existing" -- For purposes of this ebook we define "existing" as a business that is up and running, offers a product and/or service, has a physical location, and financial records.
"Goodwill" -- An intangible asset which provides a competitive advantage, such as a strong brand, reputation, or high employee morale. In an acquisition, goodwill appears on the balance sheet of the acquirer in the amount by which the purchase price exceeds the net tangible assets of the acquired company.
"Letter Of Intent" -- A business purchase letter of intent is really a non-binding agreement that says "I would like to buy your business for an asking price of $xxxx, but first I want to take a closer look at your business".
"Seller's Discretionary Cash (SDC)" -- Profit and loss line items added to the bottom line. Used in a cash-flow valuation.
"Small Businesses"-- Rather than define "Small Businesses" based on annual sales, number of employees, or other quantitative measures, Let's define a small business as one with only one level of management, namely you, the owner. This definition may not be perfect but for purposes of our discussion it better sums up what most small businesses really are.
Conclusion
My advise when buying a any business is to be cynical and pessimistic. Accept nothing on faith. Look for trouble before it finds you.
For more information
GO HERE
DISCLAIMER: The purpose of the information contained within this Blog is to provide general guidelines for various subjects of interest. Your use of this information is at your own risk. Each user of this Blog should consult a qualified professional who understands the user's particular factual situation before making decisions, and PRO-BIZ marketing, LLC makes no express or implied representations or warranties. PRO-BIZ marketing, LLC does not guarantee the completeness, accuracy or timeliness of this informationa
Showing posts with label small business. Show all posts
Showing posts with label small business. Show all posts
Tuesday, April 07, 2009
Thursday, April 02, 2009
Buying An Existing Business Part VIII of IX
Valuing A Business
There are three basic approaches to valuing a small business: assets, market comparisons, and earnings,.
Buyers and sellers are adversaries; sellers want to sell the business for as much as they can and buyers want to pay as little as they need to. What process then should you use to value a small business?
The assets approach is useful but mostly when the value of the earnings is less than the value of the assets or when the earnings are in a downward trend with a doubtful future. Then the value of the assets becomes significant, particularly the liquidation value.
The market comparisons approach is to compare the subject business with businesses recently sold of similar location, type, and size. The idea is to adjust the actual sale prices and terms to align with the subject. This method is commonly used in real estate appraisals. It may also be used for franchises that are in many ways common. This approach, however, does not work well for small businesses in general because of their lack of commonality and also because the data needed to make market comparisons—actual sale prices and terms—are not usually a matter of public record. The market approach, therefore, is not very useful to small business valuation.
The value of a small business, and therefore its selling price, only makes sense when it's based on the cash flow or earnings approach. The cash flow approach is the one most important for valuing small businesses for the purpose of buying and selling. Using this approach, there are two methods of appraising: capitalization of earnings and preparation of cash-flow projections.
For more information regarding the cash-flow projections method:
GO HERE
DISCLAIMER: The purpose of the information contained within this Blog is to provide general guidelines for various subjects of interest. Your use of this information is at your own risk. Each user of this Blog should consult a qualified professional who understands the user's particular factual situation before making decisions, and PRO-BIZ marketing, LLC makes no express or implied representations or warranties. PRO-BIZ marketing, LLC does not guarantee the completeness, accuracy or timeliness of this information.
There are three basic approaches to valuing a small business: assets, market comparisons, and earnings,.
Buyers and sellers are adversaries; sellers want to sell the business for as much as they can and buyers want to pay as little as they need to. What process then should you use to value a small business?
The assets approach is useful but mostly when the value of the earnings is less than the value of the assets or when the earnings are in a downward trend with a doubtful future. Then the value of the assets becomes significant, particularly the liquidation value.
The market comparisons approach is to compare the subject business with businesses recently sold of similar location, type, and size. The idea is to adjust the actual sale prices and terms to align with the subject. This method is commonly used in real estate appraisals. It may also be used for franchises that are in many ways common. This approach, however, does not work well for small businesses in general because of their lack of commonality and also because the data needed to make market comparisons—actual sale prices and terms—are not usually a matter of public record. The market approach, therefore, is not very useful to small business valuation.
The value of a small business, and therefore its selling price, only makes sense when it's based on the cash flow or earnings approach. The cash flow approach is the one most important for valuing small businesses for the purpose of buying and selling. Using this approach, there are two methods of appraising: capitalization of earnings and preparation of cash-flow projections.
For more information regarding the cash-flow projections method:
GO HERE
DISCLAIMER: The purpose of the information contained within this Blog is to provide general guidelines for various subjects of interest. Your use of this information is at your own risk. Each user of this Blog should consult a qualified professional who understands the user's particular factual situation before making decisions, and PRO-BIZ marketing, LLC makes no express or implied representations or warranties. PRO-BIZ marketing, LLC does not guarantee the completeness, accuracy or timeliness of this information.
Tuesday, March 31, 2009
Buying An Existing Business Part VII of IX
Due Diligence
The phrase is composed of two words. “due” which the dictionary defines as “proper or adequate” and diligence, which is defined as “degree of care or caution expected of a person. Especially as a party to an agreement.”
The due diligence phase is the time when you will have access to the company’s books and records.
Once a price and terms are agreed upon by the buyer and seller due diligence should be performed. At this point the buyer should give the seller a down payment, and the seller should remove the business from the market during this critical period.
This critical investigation period can last up to four weeks for most small businesses. Keep in mind, however, the time period is negotiable.
A proper due diligence period goes beyond the financials. At a minimum you should also investigate the assets, the customers, the suppliers, the employees, the competition, the market, the industry, the sales strategy, marketing possibilities, contracts, legal issues, and so on. When you have finished your due diligence you should feel comfortable that you and the business are a match, and if something needs fixing you can fix it at a reasonable cost.
Now is the time you should get your accountant to help you identify risk areas. I’ve been in negotiations with business sellers for many years and have been forced to "walk" on several transactions because I found out the numbers were not real. I often had to be very creative during the due diligence process to find the real profit or loss of the business.
Take your time and analyze whatever documents are made available. Below is a small sample of a few items to look for:
Organizational Documents
Financial Statements
Tax Returns
Canceled Checks
Employment Contracts
All Outstanding Litigation If Any
All Contracts And Outstanding Orders
Computer Systems, Software And Other Technology
Issues Regarding Environmental Problems
Payroll Records
Staff Files And The Staff Manual
Copies Of Pension And Profit-Sharing Plans
Union Contracts, If Relevant
Contracts And Leases
Having completed your research and confirmed that the information provided to you is true and correct, you have one of two choices. You can accept the seller's offer and move on or you can rewrite your offer.
DISCLAIMER: The purpose of the information contained within this Blog is to provide general guidelines for various subjects of interest. Your use of this information is at your own risk. Each user of this Blog should consult a qualified professional who understands the user's particular factual situation before making decisions, and PRO-BIZ marketing, LLC makes no express or implied representations or warranties. PRO-BIZ marketing, LLC does not guarantee the completeness, accuracy or timeliness of this information.
For More Information Go Here
The phrase is composed of two words. “due” which the dictionary defines as “proper or adequate” and diligence, which is defined as “degree of care or caution expected of a person. Especially as a party to an agreement.”
The due diligence phase is the time when you will have access to the company’s books and records.
Once a price and terms are agreed upon by the buyer and seller due diligence should be performed. At this point the buyer should give the seller a down payment, and the seller should remove the business from the market during this critical period.
This critical investigation period can last up to four weeks for most small businesses. Keep in mind, however, the time period is negotiable.
A proper due diligence period goes beyond the financials. At a minimum you should also investigate the assets, the customers, the suppliers, the employees, the competition, the market, the industry, the sales strategy, marketing possibilities, contracts, legal issues, and so on. When you have finished your due diligence you should feel comfortable that you and the business are a match, and if something needs fixing you can fix it at a reasonable cost.
Now is the time you should get your accountant to help you identify risk areas. I’ve been in negotiations with business sellers for many years and have been forced to "walk" on several transactions because I found out the numbers were not real. I often had to be very creative during the due diligence process to find the real profit or loss of the business.
Take your time and analyze whatever documents are made available. Below is a small sample of a few items to look for:
Organizational Documents
Financial Statements
Tax Returns
Canceled Checks
Employment Contracts
All Outstanding Litigation If Any
All Contracts And Outstanding Orders
Computer Systems, Software And Other Technology
Issues Regarding Environmental Problems
Payroll Records
Staff Files And The Staff Manual
Copies Of Pension And Profit-Sharing Plans
Union Contracts, If Relevant
Contracts And Leases
Having completed your research and confirmed that the information provided to you is true and correct, you have one of two choices. You can accept the seller's offer and move on or you can rewrite your offer.
DISCLAIMER: The purpose of the information contained within this Blog is to provide general guidelines for various subjects of interest. Your use of this information is at your own risk. Each user of this Blog should consult a qualified professional who understands the user's particular factual situation before making decisions, and PRO-BIZ marketing, LLC makes no express or implied representations or warranties. PRO-BIZ marketing, LLC does not guarantee the completeness, accuracy or timeliness of this information.
For More Information Go Here
Saturday, March 28, 2009
Buying An Existing Business Part VI of IX
Finding The Right Business
There are different ways to find and purchase a small business. You might seek out business brokers that specialize in selling small businesses; you can search the Internet, look in the Newspaper Classified Advertising under business for sale, ask friends or even drive around searching for a business.
Here is a list of additional resources:
The Yellow Pages
The Public Library
Business Opportunities Advertisements
Trade Magazines
Trade Organizations
Suppliers
Bank Trust Departments.
Accountants
Commercial Real Estate Firms
The Secretary Of State
Attorneys
Place Your Own Advertisement
Professional Business Brokers
A few words regarding Professional Business Brokers:
Using a Professional Business Broker to discover businesses for sale, reduces the buyer’s time and effort to do that work, and also reduces the loss of enthusiasm caused by failures and rejections. The Professional Business Broker also finds businesses that the buyer might never locate through his/her own efforts.
Moreover, if the buyer is not sure of the type of business being sought the broker can make suggestions. Here, however, I must warn you: not all brokers are good judges of buyers’ qualifications. The problem, therefore, is you could waste time pursuing an unsuitable business.
And finally, you don't have to limit your search to businesses that have been listed for sale. Should you find a business that you might be interested in owning, seek out the owner and let him/her know your interested in purchasing the business.
You can find many small businesses sale. You can find many great deals. Finding them is not the problem. I have found thousands in my 25 years as a Professional Business Broker. The big problem is making certain that the business will do what the seller says it will do.
DISCLAIMER: The purpose of the information contained within this Blog is to provide general guidelines for various subjects of interest. Your use of this information is at your own risk. Each user of this Blog should consult a qualified professional who understands the user's particular factual situation before making decisions, and PRO-BIZ marketing, LLC makes no express or implied representations or warranties. PRO-BIZ marketing, LLC does not guarantee the completeness, accuracy or timeliness of this information.
There are different ways to find and purchase a small business. You might seek out business brokers that specialize in selling small businesses; you can search the Internet, look in the Newspaper Classified Advertising under business for sale, ask friends or even drive around searching for a business.
Here is a list of additional resources:
The Yellow Pages
The Public Library
Business Opportunities Advertisements
Trade Magazines
Trade Organizations
Suppliers
Bank Trust Departments.
Accountants
Commercial Real Estate Firms
The Secretary Of State
Attorneys
Place Your Own Advertisement
Professional Business Brokers
A few words regarding Professional Business Brokers:
Using a Professional Business Broker to discover businesses for sale, reduces the buyer’s time and effort to do that work, and also reduces the loss of enthusiasm caused by failures and rejections. The Professional Business Broker also finds businesses that the buyer might never locate through his/her own efforts.
Moreover, if the buyer is not sure of the type of business being sought the broker can make suggestions. Here, however, I must warn you: not all brokers are good judges of buyers’ qualifications. The problem, therefore, is you could waste time pursuing an unsuitable business.
And finally, you don't have to limit your search to businesses that have been listed for sale. Should you find a business that you might be interested in owning, seek out the owner and let him/her know your interested in purchasing the business.
You can find many small businesses sale. You can find many great deals. Finding them is not the problem. I have found thousands in my 25 years as a Professional Business Broker. The big problem is making certain that the business will do what the seller says it will do.
DISCLAIMER: The purpose of the information contained within this Blog is to provide general guidelines for various subjects of interest. Your use of this information is at your own risk. Each user of this Blog should consult a qualified professional who understands the user's particular factual situation before making decisions, and PRO-BIZ marketing, LLC makes no express or implied representations or warranties. PRO-BIZ marketing, LLC does not guarantee the completeness, accuracy or timeliness of this information.
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