How to Buy andor Sell a Small Business for Maximum Profit: A Step-by-Step Guide- 2ND EDITION by By Rene V. Richards & Updated by Constance H. Marse

Author:By Rene V. Richards & Updated by Constance H. Marse
Language: eng
Format: epub
Tags: insight, buy, sell, small business, process, capital, legal, financial, evaluating, value, condition, taxes
Publisher: Atlantic Publishing
Published: 2013-01-09T00:00:00+00:00

Cash

$15,000.00

$15,000.00

$15,000.00

Accounts Receivable

$25,000.00

$20,000.00

$12,500.00

Inventory

$65,000.00

$63,000.00

$52,000.00

Prepaid Rents/Insurance

$5,000.00

$5,000.00

$1,000.00

Fixed Assets

Equipment

$54,000.00

$44,300.00

$27,000.00

Fixtures/Buildings

$48,000.00

$41,200.00

$22,000.00

Other

$8,000.00

$5,500.00

$1,000.00

Total

$220,000.00

$194,000.00

$130,500.00

As you can see, the value of the business depends in large part on the timing of the purchase and the condition and distribution of the valuables.

Book-value method for valuation is not used for determining the selling price of a business so much as it is used to support either a fair market value or a liquidation value. The book valuation of equipment and other fixed assets is used more for tax-reporting purposes and depreciation of the business than for actual business valuation in a buy/sell arrangement. It can, however, be used to compare and aid in establishing the fair market and liquidation values.

Upon reaching a valuation for the tangible assets, and depending upon the business’s individual situation, you may or may not find it necessary to include a value for the intangibles such as goodwill, income, or cash flow. This valuation is also known as the time-value-of-money concept (multiple method and discounted method) and the use of customer lists to establish value. Each of these intangibles will be discussed in depth below due to the important role the intangibles play in the process of valuation.

Goodwill receives recognition here because many business owners will place a value on their businesses that exceeds the actual asset value. Goodwill is the difference between the asking price and the actual asset-value price. An understanding of the manner in which goodwill can affect your negotiations as well as your tax liability in the future is necessary in order for you to assess the financial impact for the owner and the prospective buyer accurately.

Often, as you enter a situation for buying or selling a business, the price being asked exceeds the valuation placed on the business using the asset approach. How does the seller arrive at that price? He or she has incorporated the goodwill factor into the asking price of the business. What does goodwill include? The reputation of the business, the name recognition of the business, and customer loyalty (often defended with customer lists). These are intangible assets but are, nonetheless, important in determining the value of the business. You will see the goodwill value used most often with service businesses, as most of the value is usually derived from the intangibles of employee expertise and customer loyalty. If you use the asset-based approach to value the business, goodwill cannot be depreciated for tax purposes, and many lenders will not lend money based on the goodwill of the business. While the cost-based approach does not allow for the inclusion of the goodwill value as a depreciable asset, the income-based approach to valuation does. It will be discussed in the next few paragraphs.

The cash flow or income-valuation method is the most-often-used method for valuing a small business today. Although it is sometimes necessary to know the asset value of the business, it is often more important to understand the ability of the assets to generate income. When you use the cash flow or income-valuation method, you are placing a value on the past or future cash flows of the business.

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