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.
Thursday, April 02, 2009
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
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