Valuation Of A Small Business 1 example essay topic

Purchasing a Small BusinessOutlineI. Deciding to buy. Why buy a small business? B. Starting out-the nine steps. Initial details to consider 1. Are partners needed? 2.

Economic factors 3. Is the location acceptable? 4. Tax strategy II.

Where to start A. How much income is needed? B. The 'Thirteen Steps' to acquiring a business. Locating a potential purchase. The Acquisition Plan. Beginning the search-who can help? Negotiating a purchase price.

Valuation of a small business 1. Why do a valuation? 2. Choosing the method that is best for your situation 3. Some different methods of valuing a business a. Ability-To-Pay Methodb.

Discounted Cash Flow Method. Excess Earnings MethodB. Calculating goodwill C. Setting the purchase priceD. The letter of intent IV. Finding the initial capital A. Sources of financing 1. Traditional sources 2.

Nontraditional sources. Guaranteed loan programs. Closing the deal 1. Get a lawyer 2. Audit review 3. The closing VI.

The rewards of working for yourself The decision to purchase a business of your own is not an easy task. There are many things to consider before the final decision is made. First of all, exactly what do you want to accomplish? To make millions of dollars, right?

Or is it to have the freedom of being your own boss? Whatever the reason, you must be sure that it is something that you are ready to devote an exorbitant amount of time and energy into and that it is something that you really want. Otherwise, you might be stuck doing something that you hate. If you are ready to commit then you must ask yourself just how far will that commitment extend.

How much of your own time, energy, and money are you willing to sacrifice? After the decision is made, the acquisition of a small business can be summed-up into nine steps, in which most will be elaborated upon later. 'These are the nine steps to any business acquisition, regardless of its size or industry: 1. The search, locating a business available for sale. 2.

Identifying alternative candidates. 3. Valuing the business. 4. Negotiating a price and terms. 5.

Investigating the company. 6. Preparing the business plan. 7.

Sourcing the financing. 8. Preparing the closing documents. 9. Managing the transition period. ' (Tuller, 10) Some considerations that cannot be avoided when purchasing a small business include: the question of needing a partner, the current economic factors, considering alternate locations, and developing a tax strategy.

When debating whether or not a partner is needed or wanted, you need to know if you " re going to need additional equity as well as sharing the risk of failure. For these reasons, a partnership seems to be a great idea, but there are also many cons that should be recognized. Having too many partners can alter the ease of decision-making, shared liability can cause obvious problems, and sharing profits means less for you. Added to this, getting out of a partnership can be very difficult. Evaluating the current economic factors simply means to know what you are getting into. Be sure to have some knowledge about the business itself and it's market.

Know how to make and sell the product efficiently and in a service industry, be sure to know the current and correct way things are done-sometimes they are not one in the same. Location is key. 'Location of the target can be a major determinate in both the financing of the deal and probable success in managing the business after closing. There's no sense spending time, effort, and money on a target located in the wrong place. ' (Tuller, 12) Along with this, the personal strife of having to travel a great distance to get to work can be very frustrating. So, be sure that the location of your potential business is profitable in every way.

One the greatest minds of the 20th century, Albert Einstein, once said, 'tax is the most difficult thing in the world to understand'. Unfortunately, with the ever-changing laws, that problem gets worse every year. This means that you should have knowledge of the current tax laws. 'You will have a unique opportunity to make decisions on exactly how much money will change hands, and how I will allocated on the payment schedule. ' (Smorgenburg, 112) Maximizing profit for both you and the seller can only be done through proper knowledge of tax law, if you are not comfortable handling this alone, a consultant might not bad a bad idea. After all of the above is settled, the next thing to figure is the amount of initial income is required.

Not only the income required to purchase the entity (which will be elaborated upon later), but also the amount of money that you need to survive for the years to come. 'If you need $100,000, then don't look at smaller companies which can only yield $30,000. ' (Tuller, 23) 'The following 13 steps will help to locate a target and close the deal in the shortest possible time-and when buying a company, time is money. 1. Define realistic parameters. 2.

Prepare a reasonable Acquisition Plan. 3. Review current tax laws for structuring the deal. 4. Develop a detailed plan for sourcing potential targets. 5.

Perform a preliminary due diligence investigation. 6. Negotiate a price and terms based on a realistic valuation. 7. Perform a thorough due diligence investigation. 8.

Prepare a complete business plan. 9. Develop sources for at least three alternative financing structures. 10. Arrange for the final updated due diligence investigation. 11.

Write the Buy / Sell Agreement and negotiate the final contract language. 12. Plan how you will operate the company after closing. 13. Attend the closing.

Yet another crucial instrument in the purchase of any business is the Acquisition Plan. This document lists every step and detail leading to the closing of the deal. Starting with the industry survey, it lists the start date, the finish date, and the cost of each of these processes. Following the survey is the target search, then on to the due diligence investigations. The importance of this plan revolves around the organization of a solid purchase. With this, you are able to enact the purchase at the right moment for you, this time being a buyer's market.

If you need to wait out the bear market, you can do it much easier with everything laid out in front of you. Hence, the Acquisition Plan does the job. All of the above steps and considerations are a waste if you are unable to find a business for sale. The difficulty of finding the type of business that you will purchase is put to ease through an M & A consultant, accountant, or simply browsing the Wall Street Journal.

A smaller gas station or party store-type business can usually be found in the local paper. On the other hand, if you are looking for a larger company, an M & A consultant may be pricey (2-15,000 dollars for a retainer), but this is probably the best way to go. Be sure to ask the consultant many questions regarding his or her creditability. For instance, get a list of references and ask about the number of deals he closed in the past 12 months. Negotiating a purchase price involves a thorough valuation of the projected purchase. Evaluation of a business is essential because you need to know what you are paying for and how much you should pay.

' If you are a buyer, your valuation will also be helpful to you when you meet with lenders, so that you can help justify the mount you are asking to borrow. For this purpose alone, however, a valuation is not generally worth the effort. ' (Horn, 20) There are many different methods that you can use to properly determine the value of the entity. The most common methods are as follows: the Ability-To-Pay Method, this method is used in almost all buy / sell cases. It makes clear whether the acquisition can pay for itself out of its own cash flow. The Discounted Cash Flow Method is most often used when the company is going to be purchased as an investment and held for a limited number of years.

It is also used in high-risk situations, such as highly leveraged deals that have more of a proportion of debt than usual. The third method is the Excess Earnings Method, used to value any profitable company. The Excess Earnings method 'assumes that a business is worth the market value of its tangible assets, plus a premium for 'goodwill' if the earnings are high enough. ' (Horn, 51) Another are.