4 Tips to Valuing a Business For Purchases
By Ted E. Sanders Ted E. Sanders
Level: Basic PLUS
Mr. Sanders is a self described “serial entrepreneur,” and teacher. Mr. Sanders has purchased 4 businesses and started too many businesses to remember. Mr. Sanders ... Article Word Count: 646 [View Summary] Comments (0)
You've made the decision to buy a business. Good choice! Buying a business can be the best way to increase your personal wealth. You've found this wonderful illustrious business that has incredible potential and you know you are absolutely going to love working there for the rest of your life, or at least until you make your first million ;) Now the seller is asking a price that sounds right, but how did they come to that price? Valuing a business is more than often an ambiguous process that comes down to more opinion than fact. Market value for your business is the price that a reasonable buyer would pay and reasonable seller would pay for in a normal market of business sales. If you're reading this article - you're not normal. I say this in a good way. You're actually above normal. Most people who ATTEMPT to buy a business do very little studying and research into the process. Consequently they either don't buy the business due to insecurities or inadequate funding or they buy the business and fail due to poor preparation. So how much is that business worth? Here are 4 tips to assist you in valuing the business.
1. If the business is making a profit, how much of a profit does it REALLY make? I've seen business brokers, and listing agents come up with all sorts of amazing projections on what the business should be making and then trying to sell it based on that number. If the business broker or seller can predict the future then they shouldn't be in entrepreneurship - they should be in the stock market! If the price is based on earnings, and the earnings are based on "pro-forma" or projected income (not actual) then forget any price they put to the business. You're buying income not income potential. If you want some great income potential I have some swamp land for sale for you in Florida that is definitely going to go up in value - some day.
2. If the business is losing money, it's worth the assets current resale value minus the debt that you're assuming in the business. This means if the business has 1 widget that they bought for $100,000, business debt of $20,000 - you don't know the value of the business! If you can sell the widget for $40,000 and the business debt is $20,000 the business is worth $20,000.
3. What is the business worth to you? Most of the buyers I coach are individuals who are more interested in buying a business/job instead of investing millions of dollars into a business that can be made into a public offering. Consequently buying a business means replacing a full-time income for twice the work as your previous job. However people seek self employment for a variety of reasons, income, pride, the freedom of spending more time with family etc. List 10 reasons why you want to be self employed. Now put a price tag to every item you've listed. If any of those price tags are "infinite" self employment is for you.
4. The four P's - Pick your Price based on Past Performance or what was Put in the Previous owners Pocket? - Pay for past performance - never pay for what the business could or should be. Remember that you are the buyer and you should try to pick your price based on how much money the business has put in the previous owners pocket. All formal and informal business valuations are established on "net present value." Please remember that off book money absolutely can not account for the price! Off book money is money not reported to the IRS. If the seller didn't declare it as income or benefits then it does not count for the income to determine the price.
Do you want to learn more about how to buy a business? I have just completed a brand new guide in buying a business "The Corporate Raider's Guide to Creatively Financing Your First Business." Download it free here: http://www.corporateraidersguide.com/
Article Source: http://EzineArticles.com/?expert=Ted_E._Sanders
http://ezinearticles.com/?4-Tips-to-Valuing-a-Business-For-Purchases&id=2695770
Keep INVESTING Simple and Safe (KISS) ****Investment Philosophy, Strategy and various Valuation Methods**** The same forces that bring risk into investing in the stock market also make possible the large gains many investors enjoy. It’s true that the fluctuations in the market make for losses as well as gains but if you have a proven strategy and stick with it over the long term you will be a winner!****Warren Buffett: Rule No. 1 - Never lose money. Rule No. 2 - Never forget Rule No. 1.
Tuesday 10 November 2009
Valuing a Business (Power Point Presentation)
Earnings Multiple (Value-to-Earnings) Ratio:
A ratio is determined by dividing the firm’s value by its earnings that can be compared to representative ratios of recently-sold similar firms.
Normalized Earnings: Earnings that have been adjusted for unusual items, such as fire damage, and all relevant expenses, such as a fair salary for the owner’s time
Type of Firm ####Earnings Multiple
Small, well-established firms, vulnerable to recession ####7
Small firms requiring average executive ability but operating in a highly competitive environment ####4
Firms that depend on the special, often unusual, skill of one individual or a small group of managers#### 2
Risk and Growth in Determining a Firm’s Value:
Risk and Growth are Key Factors Affecting the Earnings Multiple and Firm Value
The more (less) risky the business, the lower (higher) the appropriate earnings multiple and, as a consequence, the lower (higher) the firm’s value.
The higher (lower) the projected growth rate in future earnings, the higher (lower) the appropriate earnings multiple and, therefore, the higher (lower) the firm’s value.
Cash Flow-Based Valuation
Determination of the value of a business by estimating the amount and timing of its future cash flows
Step 1. Project the firm’s expected future cash flows.
Step 2. Estimate the investors’ and owners’ required rate of return on their investment in the business.
Step 3. Using the required rate of return as the discount rate, calculate the present value of the firm’s expected future cash flows, which equals the value of the firm.
http://www.andrews.edu/~schwab/sbm-appb.ppt#8
A ratio is determined by dividing the firm’s value by its earnings that can be compared to representative ratios of recently-sold similar firms.
Normalized Earnings: Earnings that have been adjusted for unusual items, such as fire damage, and all relevant expenses, such as a fair salary for the owner’s time
Type of Firm ####Earnings Multiple
Small, well-established firms, vulnerable to recession ####7
Small firms requiring average executive ability but operating in a highly competitive environment ####4
Firms that depend on the special, often unusual, skill of one individual or a small group of managers#### 2
Risk and Growth in Determining a Firm’s Value:
Risk and Growth are Key Factors Affecting the Earnings Multiple and Firm Value
The more (less) risky the business, the lower (higher) the appropriate earnings multiple and, as a consequence, the lower (higher) the firm’s value.
The higher (lower) the projected growth rate in future earnings, the higher (lower) the appropriate earnings multiple and, therefore, the higher (lower) the firm’s value.
Cash Flow-Based Valuation
Determination of the value of a business by estimating the amount and timing of its future cash flows
Step 1. Project the firm’s expected future cash flows.
Step 2. Estimate the investors’ and owners’ required rate of return on their investment in the business.
Step 3. Using the required rate of return as the discount rate, calculate the present value of the firm’s expected future cash flows, which equals the value of the firm.
http://www.andrews.edu/~schwab/sbm-appb.ppt#8
Deciding on the right type of business to buy
Ideally any business you buy needs to fit your own skills, lifestyle and aspirations. Before you start looking, think about what you can bring to a business and what you'd like to get back.
List what is important to you. Look at your motivations and what you ultimately want to achieve. It is useful to consider:
•Your abilities - can you achieve what you want to achieve?
•Your capital - how much money do you have to invest?
•Your expectations in terms of earning - what level of profit do you need to be looking for to accommodate your needs?
•Your commitment - are you prepared for all the hard work and money that you will need to put into the business to get it to succeed?
•Your strengths - what kind of business opportunity will give you the chance to put your skills and experience to good use?
•The business sector you're interested in - learn as much as you can about your chosen industry so you can compare different businesses. It's important to take the time to talk to people already in similar businesses but the internet and a large local library will also be good sources of information. Find out how to comply with all the regulations and licences that apply to Your business sector.
•Location - don't restrict your search to your local area. Some businesses can be easily relocated
http://www.adelbb.com/tipsMore.php?id=27
List what is important to you. Look at your motivations and what you ultimately want to achieve. It is useful to consider:
•Your abilities - can you achieve what you want to achieve?
•Your capital - how much money do you have to invest?
•Your expectations in terms of earning - what level of profit do you need to be looking for to accommodate your needs?
•Your commitment - are you prepared for all the hard work and money that you will need to put into the business to get it to succeed?
•Your strengths - what kind of business opportunity will give you the chance to put your skills and experience to good use?
•The business sector you're interested in - learn as much as you can about your chosen industry so you can compare different businesses. It's important to take the time to talk to people already in similar businesses but the internet and a large local library will also be good sources of information. Find out how to comply with all the regulations and licences that apply to Your business sector.
•Location - don't restrict your search to your local area. Some businesses can be easily relocated
http://www.adelbb.com/tipsMore.php?id=27
****Best Businesses to Start or Buy: Recurring Revenue Business Models
Best Businesses to Start or Buy
Recurring Revenue Business Models
Starting a business? Buying a business? If so, there's one question that you absolutely must ask. Does your new venture have a recurring revenue business model? If not, you might want to go back to the drawing board and look at other options.
The best businesses to own are recurring revenue businesses.
(article continues below)
If you are a new entrepreneur or are searching for a business to start or buy, you might overlook this simple fact. If so, you are making a huge mistake.
To make the most money as a business owner, you want a business model that has built-in recurring revenues.
Examples of Recurring Revenue Business Models
Here are a couple of examples of recurring revenue businesses.
One friend of mine sells telecommunications services. In short, his company sells bandwidth to companies. The offerings include T1 lines, T3 lines, OC3 lines, OC12 lines and other internet access and point to point telecom offerings.
His business is a reseller of telecom services from big companies like AT&T and MCI. He doesn't have the massive overhead that those companies have. He just sells their services and offers a small amount of first-call support services.
The business has recurring revenues because whenever he sells, say, a T1 line, my friend gets a commission on every single payment the buyer makes. In other words, it's not a one-time fee. Rather, it's an annuity. As long as the customer keeps that T1, even if it's for 10 years, my friend is making money. He only had to sell the deal once, the customer typically renews every year, and he just watches as MCI and AT&T transfer money into his bank account.
That's the beauty of a recurring revenue business. In essence, you earn money now for work you did in the past.
Here's another one. Another business acquaintance of mine sells health insurance to companies. At any given time, he has maybe 50 companies with an average of 40 employees each. I'm not sure exactly what an average health premium is for his clients but let's guess that it's $500 per month. For having sold the health insurance plan, he gets 4% of every premium payment made to the health insurance company.
So, do the math. He's making 50 X 40 X $500 x 12 X .04 per year. That works out to top line revenues of $480,000. Not bad.
He has one employee on staff…a troubleshooter who handles those situations when an employee of one his clients runs into an issue with a health insurance claim. He also has rent expenses on a small office. All in, I'm guessing he's pulling in $300,000 net before taxes worst case.
If he left the country for a year to take a long vacation, he might lose a few clients. But his able assistant could handle most of the service issues. He'd still be receiving revenues in the form of commission payments. In other words, he'd be benefiting from the recurring revenues related to work he did years ago.
Alternatives to Recurring Revenue Business Models
The mistake that many new entrepreneurs make is that they don't figure out how to build a recurring revenue business.
Instead, they earn only as much money as they deserve based on very recent efforts.
This is the taxi company business model. You get a fare, drive them, and get paid. Now, to make more money, you need to find a new fare.
There are no rewards for what you do long ago. There's no cumulative building up of revenues. It is always "What have you done for me lately?" from customers. No new sale, no new revenues.
Entrepreneurs on this track are on a treadmill. If they get off the treadmill, they stop making money.
Always Look for Recurring Revenues
The key takeaway from this article is that owning a business is not a generic concept. Every business out there has different dynamics to it, which in aggregate amount to a business model.
Some business models are better than others. As an entrepreneur, you need to evaluate the business models that are available to you and choose the most profitable…offering the maximum reward for the minimum effort and risk.
Take our word for it. The best business to buy or start will be one that has recurring revenues built into the business model. Without that, you can do OK but you will always be on the treadmill. In that case, the business owns you instead of visa versa.
Related Articles
Want to learn more about this topic? If so, you will enjoy these articles:
Evaluting Business Models When Buying a Business
http://www.gaebler.com/Recurring-Revenue-Business-Models.htm
Recurring Revenue Business Models
Starting a business? Buying a business? If so, there's one question that you absolutely must ask. Does your new venture have a recurring revenue business model? If not, you might want to go back to the drawing board and look at other options.
The best businesses to own are recurring revenue businesses.
(article continues below)
If you are a new entrepreneur or are searching for a business to start or buy, you might overlook this simple fact. If so, you are making a huge mistake.
To make the most money as a business owner, you want a business model that has built-in recurring revenues.
Examples of Recurring Revenue Business Models
Here are a couple of examples of recurring revenue businesses.
One friend of mine sells telecommunications services. In short, his company sells bandwidth to companies. The offerings include T1 lines, T3 lines, OC3 lines, OC12 lines and other internet access and point to point telecom offerings.
His business is a reseller of telecom services from big companies like AT&T and MCI. He doesn't have the massive overhead that those companies have. He just sells their services and offers a small amount of first-call support services.
The business has recurring revenues because whenever he sells, say, a T1 line, my friend gets a commission on every single payment the buyer makes. In other words, it's not a one-time fee. Rather, it's an annuity. As long as the customer keeps that T1, even if it's for 10 years, my friend is making money. He only had to sell the deal once, the customer typically renews every year, and he just watches as MCI and AT&T transfer money into his bank account.
That's the beauty of a recurring revenue business. In essence, you earn money now for work you did in the past.
Here's another one. Another business acquaintance of mine sells health insurance to companies. At any given time, he has maybe 50 companies with an average of 40 employees each. I'm not sure exactly what an average health premium is for his clients but let's guess that it's $500 per month. For having sold the health insurance plan, he gets 4% of every premium payment made to the health insurance company.
So, do the math. He's making 50 X 40 X $500 x 12 X .04 per year. That works out to top line revenues of $480,000. Not bad.
He has one employee on staff…a troubleshooter who handles those situations when an employee of one his clients runs into an issue with a health insurance claim. He also has rent expenses on a small office. All in, I'm guessing he's pulling in $300,000 net before taxes worst case.
If he left the country for a year to take a long vacation, he might lose a few clients. But his able assistant could handle most of the service issues. He'd still be receiving revenues in the form of commission payments. In other words, he'd be benefiting from the recurring revenues related to work he did years ago.
Alternatives to Recurring Revenue Business Models
The mistake that many new entrepreneurs make is that they don't figure out how to build a recurring revenue business.
Instead, they earn only as much money as they deserve based on very recent efforts.
This is the taxi company business model. You get a fare, drive them, and get paid. Now, to make more money, you need to find a new fare.
There are no rewards for what you do long ago. There's no cumulative building up of revenues. It is always "What have you done for me lately?" from customers. No new sale, no new revenues.
Entrepreneurs on this track are on a treadmill. If they get off the treadmill, they stop making money.
Always Look for Recurring Revenues
The key takeaway from this article is that owning a business is not a generic concept. Every business out there has different dynamics to it, which in aggregate amount to a business model.
Some business models are better than others. As an entrepreneur, you need to evaluate the business models that are available to you and choose the most profitable…offering the maximum reward for the minimum effort and risk.
Take our word for it. The best business to buy or start will be one that has recurring revenues built into the business model. Without that, you can do OK but you will always be on the treadmill. In that case, the business owns you instead of visa versa.
Related Articles
Want to learn more about this topic? If so, you will enjoy these articles:
Evaluting Business Models When Buying a Business
http://www.gaebler.com/Recurring-Revenue-Business-Models.htm
Valuing a Business for Sale in New Zealand
Valuing a Business for Sale in New Zealand
Written by: Richard O'Brien | Posted on 06 November 2009. Tags: business mindset, selling a business
When you are planning to buy or sell a business how can you work out how much it is worth?
There are many different ways of calculating the value of a business. Many of these methods have been devised for large businesses, especially those listed on share markets. Smaller businesses (i.e. those that have less than 20 employees, – and 96% of all New Zealand businesses are in that size range) need a different approach. Sales contracts for small businesses normally define the value as the sum total of the inventory (stock), plus plant & fittings, plus goodwill. (Debtors and creditors are not normally part of the sale contract.)
The value of a business is largely influenced by profit. A person who buys a business is purchasing a future cash flow. The higher the anticipated cash flow, the higher the value of the business.
Past profits may be a good indication of future cashflow, but there is no guarantee that profits will continue at the same rate. In some cases there will be signs that profit is increasing, in others a downward trend may indicate lower expectations. Other factors such as impending rent increases, new competitors or the loss of a major contract may also raise concerns about the level of profits that can be expected in the future. Each party to a sale must form their own ideas about the future cash flow.
Defining Profits for Valuation:
There are many different measures of profit. (e.g. profit before tax or profit after tax etc.) When valuing small businesses the most useful measure of profit is known as EBPIDT – Earnings Before Proprietors Income (wages or drawings) Interest and Depreciation. (This is sometimes called the Sellers Discretionary Cashflow.) This determines the basic earning capability of the businesses before any other variables.
Valuation Method:
One method of valuing a business is to use an Earnings Multiplier. For example, a business which has a profit of $60,000 may sell for $90,000. The Earnings Multiplier in this case is 1.5 ($60,000 X 1.5 = $90,000)
Earnings Multiples:
How do you work out what earnings multiple to use? Avoid “Rules of Thumb.” Most of these are likely to be out of date at best, and downright misleading at the worst.
There are several ways of finding an appropriate Earnings Multiplier.
◦Ask acquaintances who have recent sold/bought similar businesses to the one you are interested in.
◦Ask your accountant. They may have had clients who have been involved in sales of similar businesses.
◦Your business broker can share his/her experience.
◦Use a commercial data base which lists sales by business brokers throughout NZ “BizStats”. This will tell you what earnings multiples have been used in recent sales. It will cost you $125 + GST but may provide useful guidelines.
Buying or selling a business is a major investment decision. Careful research and professional advice can help you to get the right value.
http://businessblogs.co.nz/2009/11/06/valuing-a-business-for-sale-in-new-zealand/
Written by: Richard O'Brien | Posted on 06 November 2009. Tags: business mindset, selling a business
When you are planning to buy or sell a business how can you work out how much it is worth?
There are many different ways of calculating the value of a business. Many of these methods have been devised for large businesses, especially those listed on share markets. Smaller businesses (i.e. those that have less than 20 employees, – and 96% of all New Zealand businesses are in that size range) need a different approach. Sales contracts for small businesses normally define the value as the sum total of the inventory (stock), plus plant & fittings, plus goodwill. (Debtors and creditors are not normally part of the sale contract.)
The value of a business is largely influenced by profit. A person who buys a business is purchasing a future cash flow. The higher the anticipated cash flow, the higher the value of the business.
Past profits may be a good indication of future cashflow, but there is no guarantee that profits will continue at the same rate. In some cases there will be signs that profit is increasing, in others a downward trend may indicate lower expectations. Other factors such as impending rent increases, new competitors or the loss of a major contract may also raise concerns about the level of profits that can be expected in the future. Each party to a sale must form their own ideas about the future cash flow.
Defining Profits for Valuation:
There are many different measures of profit. (e.g. profit before tax or profit after tax etc.) When valuing small businesses the most useful measure of profit is known as EBPIDT – Earnings Before Proprietors Income (wages or drawings) Interest and Depreciation. (This is sometimes called the Sellers Discretionary Cashflow.) This determines the basic earning capability of the businesses before any other variables.
Valuation Method:
One method of valuing a business is to use an Earnings Multiplier. For example, a business which has a profit of $60,000 may sell for $90,000. The Earnings Multiplier in this case is 1.5 ($60,000 X 1.5 = $90,000)
Earnings Multiples:
How do you work out what earnings multiple to use? Avoid “Rules of Thumb.” Most of these are likely to be out of date at best, and downright misleading at the worst.
There are several ways of finding an appropriate Earnings Multiplier.
◦Ask acquaintances who have recent sold/bought similar businesses to the one you are interested in.
◦Ask your accountant. They may have had clients who have been involved in sales of similar businesses.
◦Your business broker can share his/her experience.
◦Use a commercial data base which lists sales by business brokers throughout NZ “BizStats”. This will tell you what earnings multiples have been used in recent sales. It will cost you $125 + GST but may provide useful guidelines.
Buying or selling a business is a major investment decision. Careful research and professional advice can help you to get the right value.
http://businessblogs.co.nz/2009/11/06/valuing-a-business-for-sale-in-new-zealand/
How to value a business
Valuing a business can be one of the most worrying parts of buying an existing business.
There are several valuation methods you can use. For specific advice on valuation methods see our guide on how to value and market your business. Your accountant may be able to help you value the business, but a business transfer agent, business broker or corporate financier will be best qualified to provide valuation advice.
A healthy business
To get a general idea of how healthy the business is, look at:
•the history of the business
•its current performance - sales, turnover, profit
•its financial situation - cashflow, debts, expenses, assets
•why the business is being sold
•any outstanding or major litigation the business is involved in
•any regulatory changes which might have an impact on the business
As part of your investigations, talk to the vendor and, if possible, the business' existing customers and suppliers. The vendor must be comfortable with you doing this and you must be sensitive to their position. Customer and suppliers may be able to give you information that affects your valuation, as well as information about market conditions affecting the business. Such research can also be done on the internet or at your local reference library.
For example, if the vendor is being forced to sell due to decreasing profits, your valuation might be lower.
Intangible assets
The most difficult part is valuing the intangible assets. These are usually difficult to measure and could include:
•the company's reputation
•the relationship with suppliers
•the value of goodwill
•the value of licences
•patents or intellectual property
You should consider how the value of these assets could be affected if you decide to buy the business.
Other considerations
The list below details other factors that will affect the value:
•stock
•location
•assets
•products
•debtors
•creditors
•suppliers
•employees
•premises
•competition
•benchmarking - what other businesses in the sector have sold for
•who else in the sector is for sale or on the market
Once you have considered all these factors you can then decide how much you want to offer, or whether you want to buy it at all.
If you do decide to make an offer, and agree a price with the seller, a period of time is allowed for you to verify that all of the information you have been told is accurate. This is known as due diligence.
http://www.adelbb.com/tipsMore.php?id=29
There are several valuation methods you can use. For specific advice on valuation methods see our guide on how to value and market your business. Your accountant may be able to help you value the business, but a business transfer agent, business broker or corporate financier will be best qualified to provide valuation advice.
A healthy business
To get a general idea of how healthy the business is, look at:
•the history of the business
•its current performance - sales, turnover, profit
•its financial situation - cashflow, debts, expenses, assets
•why the business is being sold
•any outstanding or major litigation the business is involved in
•any regulatory changes which might have an impact on the business
As part of your investigations, talk to the vendor and, if possible, the business' existing customers and suppliers. The vendor must be comfortable with you doing this and you must be sensitive to their position. Customer and suppliers may be able to give you information that affects your valuation, as well as information about market conditions affecting the business. Such research can also be done on the internet or at your local reference library.
For example, if the vendor is being forced to sell due to decreasing profits, your valuation might be lower.
Intangible assets
The most difficult part is valuing the intangible assets. These are usually difficult to measure and could include:
•the company's reputation
•the relationship with suppliers
•the value of goodwill
•the value of licences
•patents or intellectual property
You should consider how the value of these assets could be affected if you decide to buy the business.
Other considerations
The list below details other factors that will affect the value:
•stock
•location
•assets
•products
•debtors
•creditors
•suppliers
•employees
•premises
•competition
•benchmarking - what other businesses in the sector have sold for
•who else in the sector is for sale or on the market
Once you have considered all these factors you can then decide how much you want to offer, or whether you want to buy it at all.
If you do decide to make an offer, and agree a price with the seller, a period of time is allowed for you to verify that all of the information you have been told is accurate. This is known as due diligence.
http://www.adelbb.com/tipsMore.php?id=29
****Evaluating Business Models When Buying a Business
Buying a business? Of all the things to consider when buying a business, a thorough evaluation of the business model is the most important consideration.
(article continues below)
- How does the company I am about to buy currently make money?
- Can I continue to make money after I buy this business using the existing business model?
- Is there something I can do to change the business model to greatly improve the potential of this business?
How Does the Business Model Make Money?
How does a local drycleaning business make money? They take in clothes, dry clean them, and get paid to do that. Duh.
How does a PR firm make money? They get clients to pay them money to get media placements. Duh.
How does a website development firm make money? They build websites and get paid to do so? Duh.
How does a lawn mowing service make money? They mow lawns and get paid to do so. Duh.
How does a telecomm value-added reseller make money? They sell businesses T1 lines and other telecomm services and get paid to do so. Duh.
To evaluate the business model, you have to ask probing questions that take the discussion up a notch. Here are a few sample questions to ask when evaluating a business to buy and that company's business model:
Is their repeat business and a recurring revenue stream? A lawn mowing service can sign up clients for an entire summer, and have repeat revenues from customers every week. In contrast, a website development company might only be earning money while working on a specific project. In that respect, the website company is like a taxi driver. No fare, no income. A telecomm value-added reseller locks into a growing recurring revenue stream because they are typically compensated by the provider (e.g. MCI, Sprint, etc.) as long as their client keeps the service. Hence, in the fifth year of business, they are still earning revenues from companies they signed up five years ago, four years ago, etc.
Is the value proposition unique and can a competitor steal the business away? A dry cleaner could lose a lot of business if a comparable business opened up across the street and offered the same services at half the price. The key to a strong business model is some sort of unique positioning that cannot be easily replicated by competitors.
Can I Continue to Make Money With the Current Business Model?
Recurring Revenue Business Models
How to Buy a Business: Valuation Process
Written by Bobby Jan for Gaebler Ventures
(article continues below)
- facts that are directly related to the business and
- facts that are indirectly related to the business.
http://www.gaebler.com/Valuation-Process.htm
http://www.gaebler.com/Articles-on-Buying-a-Business.htm
http://www.gaebler.com/Business-Valuation-Trends.htm
Key Factors to Consider When Buying a Business
Buying a Business
Key Factors to Consider When Buying a Business
Written by Anna Lempereur for Gaebler Ventures
It is essential to consider key factors before buying a business to be sure that it is right for you. Here are some tips that will help you make the right decision, and prevent you from heading in the wrong direction.
When buying a business, it is important to know what to look for, and to not rush into anything.
(article continues below)
It takes a lot of time and thought to buying a business, and failure to consider these factors may result in harming the business overall. Here are some basic factors to consider when buying a business…
Buying the Right Business for You
Many people make the mistake of buying the wrong business. It is vital to buy a business that suits your interests, personality, skills and knowledge.
Try looking for one that has some sort of relevance to work you have done in the past, or classes you have taken. If you are buying a business just for the sake of buying, that business may not be right for you.
You will know if the business is right for you because you are interested in it, and are confident enough that you can offer what is necessary to make it successful.
Research the Business's History
After you have chosen a business that you feel suits you best, do a little research on its history and finances.
Be sure to carefully review copies of the business's certified financial records, including cash flow statements, balance sheets, accounts payable and receivable, employee files, including benefits and any employee contracts, and major contracts and leases, as well as any past lawsuits and other relevant information.
This research will give you a thorough background on how the company works, as well as alert you to any problems that may be faced in the future. It is important to have a full understanding on the way the business runs before making any decisions.
Hope for the Best But Plan for the Worst
What if your projected sales for the business are off by 25% in the first year? Will you survive?
It's important to evaluate various worst case scenarios to see if and how you will survive them.
We know one entrepreneur who bought a drycleaning business and then watched the business revenues plummet by 50% when the economy dipped into a recession. He survived but said it was an extremely painful business lesson.
Develop a Plan for Promoting the Business
Although the business is already established, it is necessary to have some sort of advertising and marketing plan that will maintain the momentum of the business after you take over.
No matter how many customers the business already has, promoting the business is still a priority. Don't think that the work is already done for you, because you indeed have plenty of work to do. Be sure to have plans made for promoting the business, because it is very possible for the company to head for a downfall if you are not prepared.
Negotiate for a Good Price
Never forget that the seller's asking price is just a starting point for negotiation.
According to industry data from business brokers, businesses typically sell for between 15 percent and 25 percent below the business seller's initial asking price.
If you pay the asking price, there's a strong chance you are overpaying for the business.
The key is to figure out what you are willing to pay and keep your emotions out of it. If you can't get your price, just walk away and don't look back.
Anna Lempereur is a freelance writer interested in writing about small business. She is currently a Journalism major at the University of Albany in New York.
http://www.gaebler.com/Factors-to-Consider-When-Buying-a-Business.htm
Key Factors to Consider When Buying a Business
Written by Anna Lempereur for Gaebler Ventures
It is essential to consider key factors before buying a business to be sure that it is right for you. Here are some tips that will help you make the right decision, and prevent you from heading in the wrong direction.
When buying a business, it is important to know what to look for, and to not rush into anything.
(article continues below)
It takes a lot of time and thought to buying a business, and failure to consider these factors may result in harming the business overall. Here are some basic factors to consider when buying a business…
Buying the Right Business for You
Many people make the mistake of buying the wrong business. It is vital to buy a business that suits your interests, personality, skills and knowledge.
Try looking for one that has some sort of relevance to work you have done in the past, or classes you have taken. If you are buying a business just for the sake of buying, that business may not be right for you.
You will know if the business is right for you because you are interested in it, and are confident enough that you can offer what is necessary to make it successful.
Research the Business's History
After you have chosen a business that you feel suits you best, do a little research on its history and finances.
Be sure to carefully review copies of the business's certified financial records, including cash flow statements, balance sheets, accounts payable and receivable, employee files, including benefits and any employee contracts, and major contracts and leases, as well as any past lawsuits and other relevant information.
This research will give you a thorough background on how the company works, as well as alert you to any problems that may be faced in the future. It is important to have a full understanding on the way the business runs before making any decisions.
Hope for the Best But Plan for the Worst
What if your projected sales for the business are off by 25% in the first year? Will you survive?
It's important to evaluate various worst case scenarios to see if and how you will survive them.
We know one entrepreneur who bought a drycleaning business and then watched the business revenues plummet by 50% when the economy dipped into a recession. He survived but said it was an extremely painful business lesson.
Develop a Plan for Promoting the Business
Although the business is already established, it is necessary to have some sort of advertising and marketing plan that will maintain the momentum of the business after you take over.
No matter how many customers the business already has, promoting the business is still a priority. Don't think that the work is already done for you, because you indeed have plenty of work to do. Be sure to have plans made for promoting the business, because it is very possible for the company to head for a downfall if you are not prepared.
Negotiate for a Good Price
Never forget that the seller's asking price is just a starting point for negotiation.
According to industry data from business brokers, businesses typically sell for between 15 percent and 25 percent below the business seller's initial asking price.
If you pay the asking price, there's a strong chance you are overpaying for the business.
The key is to figure out what you are willing to pay and keep your emotions out of it. If you can't get your price, just walk away and don't look back.
Anna Lempereur is a freelance writer interested in writing about small business. She is currently a Journalism major at the University of Albany in New York.
http://www.gaebler.com/Factors-to-Consider-When-Buying-a-Business.htm
Three Principles of Business Valuation
Buying a Business
Three Principles of Business Valuation
Written by Bobby Jan for Gaebler Ventures
Valuing a business is an art form as much as it is a science. This article introduces three basic but important principles of business valuations to help you get started.
Are you an entrepreneur and looking for a business to buy?
(article continues below)
If you are, it is very important to understand how to value a business correctly. This article introduces three basic but important principles of business valuations to help you get started.
The Principle of Alternatives
The Principle of Alternatives states that each party always has an alternative to consummating a transaction. This seems like a no brainer but this is one of the fundamental principles of business valuation.
This principle is profound in many ways. For example, as you negotiate to buy another business, never get into the mentality that you just have to buy that business. Many companies and individuals grossly overpay as they get tunnel vision.
The Principle of Substitution
The Principle of Substitution tells us that the value of something tend to be the price paid for an equally desirable substitution. As a profit maximizing agents, we all try to minimize cost, all else equal. The value of a business, therefore, is the smallest price paid for substituting the business with something equally desirable.
Example 1: If a business could be replicated for X amount of dollars (by purchasing and operating the exact assets that a business has), then the Principle of Substitution tells us that it is the business is worth at most X amount of dollars.
Example 2: In this example, you want to determine the value of business A. Business A costs $5 million to replicate exactly. However, another equally desirable but different business could be acquired for only $2 million. The Principle of Substitution tells us that business A is worth at most $2 million dollars.
The Principle of Future Benefits
Unless you are buying a company only to liquidate instantly, you care a lot about the future benefits of owning that business. The Principle of Future Benefits tells us the economic value of a business reflects (anticipated) future benefits.
Although you shouldn't buy a business solely based on the past, the past could sometimes be an indicator of what is to come. The Principle of Future Benefits is why a fast growing company sells for much more than a slow growing one. The principle also explains why an industry might experience a surge in business valuations when a favorable has been passed.
Cheng Ming (Bobby) Jan is an Economics major at the University of Chicago who has a strong interest in entrepreneurship and investing.
http://www.gaebler.com/Three-Principles-of-Business-Valuation.htm
Three Principles of Business Valuation
Written by Bobby Jan for Gaebler Ventures
Valuing a business is an art form as much as it is a science. This article introduces three basic but important principles of business valuations to help you get started.
Are you an entrepreneur and looking for a business to buy?
(article continues below)
If you are, it is very important to understand how to value a business correctly. This article introduces three basic but important principles of business valuations to help you get started.
The Principle of Alternatives
The Principle of Alternatives states that each party always has an alternative to consummating a transaction. This seems like a no brainer but this is one of the fundamental principles of business valuation.
This principle is profound in many ways. For example, as you negotiate to buy another business, never get into the mentality that you just have to buy that business. Many companies and individuals grossly overpay as they get tunnel vision.
The Principle of Substitution
The Principle of Substitution tells us that the value of something tend to be the price paid for an equally desirable substitution. As a profit maximizing agents, we all try to minimize cost, all else equal. The value of a business, therefore, is the smallest price paid for substituting the business with something equally desirable.
Example 1: If a business could be replicated for X amount of dollars (by purchasing and operating the exact assets that a business has), then the Principle of Substitution tells us that it is the business is worth at most X amount of dollars.
Example 2: In this example, you want to determine the value of business A. Business A costs $5 million to replicate exactly. However, another equally desirable but different business could be acquired for only $2 million. The Principle of Substitution tells us that business A is worth at most $2 million dollars.
The Principle of Future Benefits
Unless you are buying a company only to liquidate instantly, you care a lot about the future benefits of owning that business. The Principle of Future Benefits tells us the economic value of a business reflects (anticipated) future benefits.
Although you shouldn't buy a business solely based on the past, the past could sometimes be an indicator of what is to come. The Principle of Future Benefits is why a fast growing company sells for much more than a slow growing one. The principle also explains why an industry might experience a surge in business valuations when a favorable has been passed.
Cheng Ming (Bobby) Jan is an Economics major at the University of Chicago who has a strong interest in entrepreneurship and investing.
http://www.gaebler.com/Three-Principles-of-Business-Valuation.htm
How to define the economic value of a business
Economic Value
Written by Bobby Jan for Gaebler Ventures
If you are looking to buy a business, it is important to understand how to define the economic value of a business. By looking at how much the business is worth through various business valuation lenses, you can determine what price you might be willing to offer.
If you are looking to business, it is important to determine the value of the business.
(article continues below)
Value comes in many different forms.
Some people buy certain businesses to increase their social standing while other run businesses as a hobby. Most entrepreneurs, however, are concerned with the economic value of a business.
There are many subtypes of economic value. This article will introduce some of them.
Book Value
The book value is the value of a business or a portion of a business that is stated in financial statements and accounting records. This value is often lower than the market value of a business due to tax considerations.
Fair Market Value or Market Value
Market Value often defined as the price the owner is willing to accept and that the buyer is willing to pay. There are many methods for determining the market value of a business. The most commonly used method is the discounted cash flow methods.
Going Concern Value
Going concern value is the value of the business as a whole and not the sum of its parts.
Goodwill Value
Goodwill includes:
The value of a business that is in excess of the total capital invested in the business.
The intangible assets of a business such as its brand name. For example, the Coca-cola brand name is worth billions.
Replacement Value
The replacement value of a business is determined by how much it will cost to replace the assets of a business.
Liquidation Value
The liquidation value is the net proceeds from selling a business. It is important, however, to take into account how the business will be liquidated. Namely, how much time does the business owner have to sell the business?
Cheng Ming (Bobby) Jan is an Economics major at the University of Chicago who has a strong interest in entrepreneurship and investing.
http://www.gaebler.com/Three-Principles-of-Business-Valuation.htm
Written by Bobby Jan for Gaebler Ventures
If you are looking to buy a business, it is important to understand how to define the economic value of a business. By looking at how much the business is worth through various business valuation lenses, you can determine what price you might be willing to offer.
If you are looking to business, it is important to determine the value of the business.
(article continues below)
Value comes in many different forms.
Some people buy certain businesses to increase their social standing while other run businesses as a hobby. Most entrepreneurs, however, are concerned with the economic value of a business.
There are many subtypes of economic value. This article will introduce some of them.
Book Value
The book value is the value of a business or a portion of a business that is stated in financial statements and accounting records. This value is often lower than the market value of a business due to tax considerations.
Fair Market Value or Market Value
Market Value often defined as the price the owner is willing to accept and that the buyer is willing to pay. There are many methods for determining the market value of a business. The most commonly used method is the discounted cash flow methods.
Going Concern Value
Going concern value is the value of the business as a whole and not the sum of its parts.
Goodwill Value
Goodwill includes:
The value of a business that is in excess of the total capital invested in the business.
The intangible assets of a business such as its brand name. For example, the Coca-cola brand name is worth billions.
Replacement Value
The replacement value of a business is determined by how much it will cost to replace the assets of a business.
Liquidation Value
The liquidation value is the net proceeds from selling a business. It is important, however, to take into account how the business will be liquidated. Namely, how much time does the business owner have to sell the business?
Cheng Ming (Bobby) Jan is an Economics major at the University of Chicago who has a strong interest in entrepreneurship and investing.
http://www.gaebler.com/Three-Principles-of-Business-Valuation.htm
Why Understand Business Valuation
Why Understand Business Valuation
Written by Bobby Jan for Gaebler Ventures
What is my business worth? It's a common question for entrepreneurs, and there are several occasions when you might need to be able to answer the business valuation question. This article introduces some of reasons for determining the value of a business.
Any entrepreneur worth their salt must understand something about business valuation as it is important for buying and growing businesses.
(article continues below)
The following are some of reasons for determining the value of a business.
Selling and Buying Businesses
Don't simply leave valuation to the professionals. Serious entrepreneurs must be able to recognize a good or fair deal. Value should be the most fundamental consideration when it comes to buying and selling businesses.
To Borrow Money
When you borrow money, sometimes a portion of your business must be offered as collateral. It would be wise to understand the value of your collateral to ensure that the terms of the loan reflect its true value.
For Insurance Purposes
Business valuation is important when determining the insurable value of assets. It is also important for obtaining fair settlement from insurance companies.
Designing Buy-Sell Agreements
Since buy-sell agreements often specify a price or a procedure for determining price, a working knowledge of business valuation is essential.
Employees Stock Ownership Plans
Employees Stock Ownership Plans, or ESOP, has many benefits over cash payments. Correctly pricing stocks, which comes from correctly valuing a business, is essential for an effective ESOP.
Cheng Ming (Bobby) Jan is an Economics major at the University of Chicago who has a strong interest in entrepreneurship and investing.
http://www.gaebler.com/Why-Understand-Business-Valuation.htm
Written by Bobby Jan for Gaebler Ventures
What is my business worth? It's a common question for entrepreneurs, and there are several occasions when you might need to be able to answer the business valuation question. This article introduces some of reasons for determining the value of a business.
Any entrepreneur worth their salt must understand something about business valuation as it is important for buying and growing businesses.
(article continues below)
The following are some of reasons for determining the value of a business.
Selling and Buying Businesses
Don't simply leave valuation to the professionals. Serious entrepreneurs must be able to recognize a good or fair deal. Value should be the most fundamental consideration when it comes to buying and selling businesses.
To Borrow Money
When you borrow money, sometimes a portion of your business must be offered as collateral. It would be wise to understand the value of your collateral to ensure that the terms of the loan reflect its true value.
For Insurance Purposes
Business valuation is important when determining the insurable value of assets. It is also important for obtaining fair settlement from insurance companies.
Designing Buy-Sell Agreements
Since buy-sell agreements often specify a price or a procedure for determining price, a working knowledge of business valuation is essential.
Employees Stock Ownership Plans
Employees Stock Ownership Plans, or ESOP, has many benefits over cash payments. Correctly pricing stocks, which comes from correctly valuing a business, is essential for an effective ESOP.
Cheng Ming (Bobby) Jan is an Economics major at the University of Chicago who has a strong interest in entrepreneurship and investing.
http://www.gaebler.com/Why-Understand-Business-Valuation.htm
Price Versus Value When Buying a Business
Price Versus Value When Buying a Business
Written by Bobby Jan for Gaebler Ventures
If you are an entrepreneur and looking to buy a business, there are a few concepts worth understanding. This article covers the concepts of price, value, and cost.
Wondering how to value a business?
(article continues below)
Warren Buffett once said, "Price is what you pay, value is what you get."
Business valuation is difficult and too many people use price as the signal for value. The price for value confusion can be costly.
Price is the amount of currency paid to acquire an asset. Cost is the total amount of one or more commodity to acquire an asset.
These commodities could be anything from time, natural resources, currency, etc. Cost and price are closely related and are often interchangeable. However, in many cases, the price paid for an asset and the cost of acquiring it might be significantly different.
Without getting philosophical, value is the intrinsic economic worth of an asset. Value refers to the true worth of an asset as according to some standard. For example, you an asset's value might be how much it can produce another product.
Often, the value of an asset is ultimately how much it contributes to the bottom line of a business. The goal of business valuation is to determine the value of a business.
Paying attention to price instead of value caused many personal and social tragedies in history. Investing based on price is responsible for the Tulip Mania in the 17th century, the Great Depression in early 20th century, and most recently the dot.com bubble in the late 1990s
On the other hand, buying based on value has made many individuals very wealth, including the richest man in the world, Warren Buffett.
Cheng Ming (Bobby) Jan is an Economics major at the University of Chicago who has a strong interest in entrepreneurship and investing.
Written by Bobby Jan for Gaebler Ventures
If you are an entrepreneur and looking to buy a business, there are a few concepts worth understanding. This article covers the concepts of price, value, and cost.
Wondering how to value a business?
(article continues below)
Warren Buffett once said, "Price is what you pay, value is what you get."
Business valuation is difficult and too many people use price as the signal for value. The price for value confusion can be costly.
Price is the amount of currency paid to acquire an asset. Cost is the total amount of one or more commodity to acquire an asset.
These commodities could be anything from time, natural resources, currency, etc. Cost and price are closely related and are often interchangeable. However, in many cases, the price paid for an asset and the cost of acquiring it might be significantly different.
Without getting philosophical, value is the intrinsic economic worth of an asset. Value refers to the true worth of an asset as according to some standard. For example, you an asset's value might be how much it can produce another product.
Often, the value of an asset is ultimately how much it contributes to the bottom line of a business. The goal of business valuation is to determine the value of a business.
Paying attention to price instead of value caused many personal and social tragedies in history. Investing based on price is responsible for the Tulip Mania in the 17th century, the Great Depression in early 20th century, and most recently the dot.com bubble in the late 1990s
On the other hand, buying based on value has made many individuals very wealth, including the richest man in the world, Warren Buffett.
Cheng Ming (Bobby) Jan is an Economics major at the University of Chicago who has a strong interest in entrepreneurship and investing.
****Buying & Selling a Business: Determining The Value Of A Business
Determining The Value Of A Business
Source: Small Business Management
There are two basic methods of determining the value of a business.
- The first is based on expectations of future profits and return on investment. This method is preferable by far. It forces the buyer and seller to give at least minimum attention to such factors as trends in sales and profits, capitalized value of the business, and expectancy of return on investment.
- The second method is based on the appraised value of the assets at the time of negotiation. It assumes that these assets will continue to be used in the business. This method gives little consideration to the future of the business. It determines asset values only as they relate to the present. It is the more commonly used, not because it is more reliable, but because it is easier. The projections needed to value the business on the basis of future profits are difficult to make.
The most important projection to be determined in the projected income statement is the sales figure. After this number has been established, the cost, expense, and profit figures are easier to acquire. The data for projecting sales will come from past sales records of the business. The more accurate and systematic these records are, the more confidently they can be used in estimating future sales.
There are numerous methods by which sales forecasts can be made. Most of them take their lead from the past sales performance of the company. For establishing trends or averages, 5 years of sales history is better than 3, and 10 is better than 5.
If a buyer wants to invest money in a business that is being sold, he should be concerned about receiving a fair return on his investment.
The price to be paid by the buyer should be based on the capitalized value of future earnings. Instead, however, in most small business buy-sell transactions, price is based on the purchase and sale of assets, Profits are made by utilizing assets, of course, but actually the assets purchased are only incidental to the future profits of the new business.
The majority of buy-sell transactions are based on a value established for the assets of the company. This approach is not recommended, but if it is to be used, the suggestions that follow should be considered. A most important point is to find out early in the transaction just what assets are to be transferred. Usually, the seller has some personal items that he does not wish to sell. Prepaid insurance, some supplies and the like, in addition to cash, marketable securities, accounts receivable, and notes receivable usually are not sold. If the buyer does purchase the receivables, the seller may guarantee their collection, but such a guarantee should be established.
In a service business, placing a value on the inventories is a minor problem; but in distributive and manufacturing businesses, the inventory is likely to be the largest single asset. A manufacturer, for example, has three inventories - raw material, work in process, and finished goods - and each of them presents different problems in valuation. The distributive company has only one inventory, called merchandise inventory.
When a manufacturing company is being exchanged, the raw materials inventory is taken and priced like the merchandise inventory of a distributive business. The work-in-progress and finished-goods inventories may present a problem. Usually, there is no market price or cost of last purchase to relate to these inventories; consequently, the seller’s cost is generally used for establishing prices.
These two items are usually quite small. They should present no problem, though some of them may have no value to the buyer if the name of the company is to be changed. After the usable supplies have been determined, a physical inventory should be taken and priced as in the case of the merchandise inventory.
The property-asset account normally reflects the cost of the assets reduced by a provision for depreciation. In many small business buy-sell transactions, no real property is exchanged, because the plant site is leased. The problem of establishing a value on real estate is not as acute, anyway, since the market value for real property does not fluctuate as widely as the market value for personal property, It is customary to have an independent appraiser establish a value for real property. Appraisers' findings on real property are usually more acceptable to both parties than personal-property appraisals - the real property may have multiple uses, whereas personal property consists of single-purpose assets. The book value of real property will be close to the appraisal value unless the property has been held for a long period of time or unusual circumstances have caused sudden and drastic changes of real-property values.
The buyer may feel that he knows going values of the personal property and decide not to retain an independent appraiser. In addition, many individuals believe that cost or book value is a good place to begin negotiations for personal property. However, because of the many methods of computing depreciation and also because of conflicting ideas about capitalizing costs, the cost or book value may not reflect a value that is agreeable to both parties.
Income tax consequences of the buy-sell transaction may be an important bargaining issue if the buyer and seller are aware of them. The seller should be concerned about the amount of tax he will have to pay on his gains from the sale. The buyer should be concerned about the tax basis he will acquire as a result of the transaction. These concerns almost inevitably lead the buyer and seller into conflict in valuing the business.
This example will help to bring the factors discussed about into better focus. It is not intended to show what should be done but to give some idea of what might be done.
If Critser feels that his return on investment should be capitalized over 5 years, his offering price, based on anticipated profits for the year ahead, would be $79,500 (5 years=20 percent per year; $15,900 / 0.20=$79,500 ). If, on the other hand, the purchase was based on the appraised value of assets only, the purchase price would be $70,412 plus any provision for goodwill.
How does a business transfer agent go about valuing a business?
Leading business transfer agents discuss the myriad issues surrounding business valuation:
- such as the various causes of overvaluation,
- how the same business can be given significantly different values by different agents, and
- how the urgency with which you need a sale is often pivotal to the price you achieve.
Don Glossop, Andon Frères
"The valuation of companies is not a precise science, it's a complex process based on an array of different information that can be subject to change. It's not like valuing a residential property, where you can rely on similar properties in the area and make adjustments based on numbers of bedrooms, a single or double garage or an en-suite bathroom, etc.
- "Management, individuals with experience looking to buy their own business, typically don't have the funds to buy a business outright and have to borrow to raise the asking price, in which case servicing the debt has to be factored into their calculations of value.
- "Then there are corporate buyers, not in the same industry, but in, say, an adjacent, complementary sector, looking for diversification, that can see benefits from such an acquisition and might be prepared to pay a premium.
- "Finally, there are trade buyers – ie, competitors – who work in the same sector, have similar or larger operations and can see synergies and potential economies of scale, which again might make them be prepared to pay a premium.
"The sad truth is that of the many thousands of businesses currently on the market the majority are set at an extremely optimistic asking price – to put it mildly.
•This is the price the business owner needs to achieve – to cover loans, pay the agents, banks and other creditors
•An agent with little experience has suggested the price (the less experience and confidence an agent has in his/her ability to value a business the more likely he is to overvalue to please the client)
•An agent suggests the price as a way of gaining the instruction as a sole selling agent. This enables them to get a large up-front fee or to make it more likely that he/she is instructed ahead of a competitor (with the intention of going back to the client after a period of time to suggest lowering the price if no interest has been generated)
•There is a lack of financial information supplied to the agent, who then has to value on verbal indications of turnover and profitability. As most owners usually overestimate their turnover and profitability, the business is overvalued
"To ensure a business is valued accurately I would suggest the following: invite two or three agents to value the business and ask for an explanation each time of how the value was calculated. The explanation should include examples of similar businesses recently sold – or on the market at least – and what adjustments and multipliers have been applied to the net profit to value the goodwill of the business.
"Anyone can give a business away. Some business transfer agencies find it simple to go in with what I would call an extremely reasonable valuation, and effectively give the business away.
"I'd say it's a simple thing to value a business – there are well known criteria. I'm aware that certain agents ignore this and effectively overvalue to gain instruction, not to sell the business.
"Overvaluations are usually caused by salesmen who have been given very aggressive targets by their employers and are required to get a large up-front fee to meet those targets.
"Two things spring to mind. First, when the vendor has a particularly good business and believes it's worth above and beyond its true value, and they can hold that view so strongly that the buyers believe the hype. It's like houses, when people put crazy prices on them and people pay it because they're scared of getting left behind.
A buy-sell agreement prepares for a possible change in a business’ ownership.
By Brenda McEachern
VALUING YOUR BUSINESS
When a business principal dies or becomes disabled, what are some options for the business? A buy-sell agreement is a plan that provides for an orderly change of ownership under certain circumstances. It’s designed to establish a value for the business and sets out the terms under which the interest of the disabled or deceased shareholder will be sold to the remaining shareholders.
If properly funded, the shareholder’s family will receive fair market value (FMV) for the shares, providing them with capital to help maintain their standard of living. Also, the remaining business owners are protected from the unwelcome intrusion of the deceased’s family into their business as shareholders.
The most cost-effective method to fund a buy-sell agreement, in the case of the death of a shareholder, is through life insurance. This approach helps to ensure that the required amount of capital will be available.
Assuming the use of life insurance, how much to put in place must also be examined, with reference to the particular business situation. For example, an arm’s-length arrangement would demand that the full FMV of the shares be covered. With a family business, however, there is flexibility to insure the tax bill, 100% of FMV or a lesser percentage.
There are three common priorities for businesses:
1. Maximizing the Benefit of the Capital Dividend Account (CDA)
Private corporations are entitled to maintain a notional tax account, called the capital dividend account (CDA), which keeps track of various tax-free surpluses accumulated by the corporation.
These surpluses may be distributed as capital dividends free of tax to the corporation’s Canadian
resident shareholders.
2. Maximizing the Capital Gains Exemption
Shareholders of farms or active businesses may qualify for a lifetime $500,000 capital gains deduction. This exemption benefits both the deceased and the surviving shareholders by reducing taxes to the estate and reducing the capital gains tax to surviving shareholders when they
ultimately sell the business.
3. Minimizing Tax
If tax minimization is a priority it is necessary to identify for whom—the deceased, the estate or the survivor. Even if the shareholders do have insurance funding in place, the tax implications vary drastically for these stakeholders, depending how the insurance proceeds are distributed.
Brenda McEachern is an estate and trust lawyer with Canada Life.
http://www.advisor.ca/images/other/ae/ae_0204b_valuingbusiness.pdf
By Brenda McEachern
VALUING YOUR BUSINESS
When a business principal dies or becomes disabled, what are some options for the business? A buy-sell agreement is a plan that provides for an orderly change of ownership under certain circumstances. It’s designed to establish a value for the business and sets out the terms under which the interest of the disabled or deceased shareholder will be sold to the remaining shareholders.
If properly funded, the shareholder’s family will receive fair market value (FMV) for the shares, providing them with capital to help maintain their standard of living. Also, the remaining business owners are protected from the unwelcome intrusion of the deceased’s family into their business as shareholders.
The most cost-effective method to fund a buy-sell agreement, in the case of the death of a shareholder, is through life insurance. This approach helps to ensure that the required amount of capital will be available.
Assuming the use of life insurance, how much to put in place must also be examined, with reference to the particular business situation. For example, an arm’s-length arrangement would demand that the full FMV of the shares be covered. With a family business, however, there is flexibility to insure the tax bill, 100% of FMV or a lesser percentage.
There are three common priorities for businesses:
1. Maximizing the Benefit of the Capital Dividend Account (CDA)
Private corporations are entitled to maintain a notional tax account, called the capital dividend account (CDA), which keeps track of various tax-free surpluses accumulated by the corporation.
These surpluses may be distributed as capital dividends free of tax to the corporation’s Canadian
resident shareholders.
2. Maximizing the Capital Gains Exemption
Shareholders of farms or active businesses may qualify for a lifetime $500,000 capital gains deduction. This exemption benefits both the deceased and the surviving shareholders by reducing taxes to the estate and reducing the capital gains tax to surviving shareholders when they
ultimately sell the business.
3. Minimizing Tax
If tax minimization is a priority it is necessary to identify for whom—the deceased, the estate or the survivor. Even if the shareholders do have insurance funding in place, the tax implications vary drastically for these stakeholders, depending how the insurance proceeds are distributed.
Brenda McEachern is an estate and trust lawyer with Canada Life.
http://www.advisor.ca/images/other/ae/ae_0204b_valuingbusiness.pdf
Subscribe to:
Posts (Atom)