The way to Value And Buy A Small Business

To be successful every business needs three issues; 1) Technical Expertise in the area of the job the business does i. e. If it is a roofing business you need to know how you can put roofs on and repair them. 2) Sufficient working funds to run the business. Working capital is current assets (Cash, Accounts Receivable, Inventory etc . ) minus current liabilities (Accounts Payable like regular utility bills, Credit Card Payments, Loan or Lease Payments etc . ). Usually 2 to 1 ratio of current assets to current liabilities is known as good. That’s twice as many present assets as bills coming credited.
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The third item needed is sufficient Company Acumen to understand financial statements and be able to read them and use them because tools to run the business and make corrective adjustments to maximize the business revenue.

Once the business has been selected for purchase, you need to know how much the owner is requesting the business. Next you need to know what is being conveyed in this sale. This would be a list of assets and their respective ideals. The value ascribed to these assets is just not new value or salvage value or depreciated book value but market value of decent used products. This value is often about half of what the item could be purchased for new. Make a list of this equipment and their own values and add them upward. Pay attention to this list and ask your self, is this a fair value for that device? Do I really need that piece of equipment to run this business? Even if the item is around the seller’s balance sheet, will I actually get that asset with the selling or is this a personal item of the seller? Next, list all the debt that the buyer will be assuming, what asset secures this debt, what the monthly payment is, the interest rate, the total amount and how many payments remain till it is paid off. Next, you take those total asset values and subtract all the debt balances being assumed to arrive at a net asset worth. Example: if the total amount of resources is $50, 000 and the loan balances assumed were $10, 000, the net asset value of the business will be $40, 000. If there is no debt being assumed, then the net resource value would be $50, 000. NOTICE: acquisition funding is not considered here. Acquisition funding is the loan the customer takes out to complete the purchase from the business over the down payment. This obtain funding can be from a bank or other source but 90% of the time it is from the seller.

Next the buyer looks to the income statement intended for pre-tax net income for the most current year prior to the sale. Look back regarding 5 to 6 years of income statements (tax returns) to see how many years demonstrated a profit. We do this to see the regularity of the income stream and to place a relative value on Good Can. Generally, if the business showed money in 6 of the last 6 years you would use 3. 5 and multiply it by the pre-tax net gain to get a good will factor. Then this good will amount will be added to the net asset value to reach at business value. Example: when the pre-tax net income was $20, 500 for the most current year past and the business showed a profit for the last six years we would multiply 3. 5 Times $20, 000 = $70, 500 in Good Will. To this good will we add the net resource value of $50, 000 to get a company value of $120, 000. This means that you should pay no more than $120, 000 for this business and hopefully less. The particular coefficients to be multiplied by pre-tax net income for no profitable yrs in the last 6 is zero for good will; 1 year = 1 . 0, 2 years = 1 . 5, three years = 2 . 0, 4 years = 2 . 5, 5 yrs = 3. 0 and six years = 3. 5. While this is a simplistic method of valuation, it is relatively accurate. It can later be refined with the Excess Earnings Method as well as the Discounted Cash Flow Method to value.

When creating the offer to purchase the business, utilize a letter of intent that is one page to state the main parts of the deal; price, what you are buying from your financial statements balance sheet, the particular income you expect from the income claims, how much you are going to put down and how very much you expect the seller to carry in buy loan for the business and for exactly what term and what interest rate and what payment per month. Remember, the seller is expecting you to believe their figures in buying the company so expect the seller to believe their own figures too and finance the particular sale himself and always try to get the seller to accept zero money down, at least to start with as you will be needing your cash for working capital to run the business.

Start your first offer with a low figure as you can always go up but it is impossible to look down usually. Negotiating technique to keep in mind: they want 10, 000 and you need 8, 000 so you start your opening bid at 6, 500 which is (10, 000 – eight, 000 = 2, 000, after that 2, 000 x 2 sama dengan 4, 000 and then 10, 000 – 4, 000 = 6, 000). The seller will usually balk with this lowball figure but if they don’t; TAKE IT! If they balk at the figure, inquire further for a credible bid back… usually they will come down about 10% and tell you 9, 000. Then you say, OK, you are at 9, 000 and I’m at 6, 000, why don’t we both give equal quantities and split the difference at 7, 500? This is 6, 000 + 9, 000 = 15, 000 divided by 2 = seven, 500. You wanted 8, 000 as a selling price and you got seven, 500, even better. Try it; IT WORKS!

Always be ready to walk away from the deal. This particular puts much pressure on the vendor to see things your way and you can often go back to negotiations at a later time. Remember too that when you are negotiating with the vendor, you are probably the ONLY buyer negotiating with the seller at that time. The other buyer waiting around to snatch it up is rarely really there. Also, remember that the customer controls the deal, the sale as well as the price. The seller by definition has to sell, the buyer doesn’t have to buy and should only buy when his conditions are met. There is always another offer coming along so be patient and obtain what you want and need out of the offer.