Buying & Selling a Business

Goodwill is the difference between the selling price and the estimated assigned values assigned to all the assets not including the goodwill. The seller's asking price will be broken down into its various components such as equipment, inventory, furniture, accounts receivable, miscellaneous assets, assumed liabilities and the difference will equal the goodwill.

Valuing a business is a tricky process with the end result being to ascertain the fair market value of the business. Fair market value is the amount at which the property would change hands between the buyer and seller when neither are under compulsion to buy and when both have reasonable knowledge of relevant facts concerning the business. The income approach is generally used when valuing small closely held businesses. When using this approach, you can determine the value of a business using one or more methods where you convert the anticipated benefits of owning the business. To find the fair market value under the income approach, divide the after tax value by the capitalization rate,(capitalization rate is the Net operating Income divided by the purchase price expressed as a percentage). Speak to your local CPA or business broker for more information about valuing a business and on your pending purchase or sale.

Valuing a business is a tricky process with the end result being to ascertain the fair market value. Fair market value is the amount at which the property would change hands between buyer and seller when neither are under compulsion to buy and when both have reasonable knowledge of relevant facts concerning the business. The Market Approach is a way to determine a value indication of a business, business ownership interest or security by comparing the entity to similar entity's that have been sold. Most small businesses finding a similar business that has been sold or finding a publicly traded company that was sold and similar in many ways to the entity is generally very challenging and difficult. The principal business or professional activity code number on the entity's tax return is a place to start in trying to find a company within the same industry as the business being valued. The Internet can be used to search and locate the Annual report 10k of a public company. The Annual report 10K statement discloses many of the ratios that should be compared to the entity being valued. Speak to your local CPA or business broker for more information about valuing a business and on your pending purchase or sale.

The discounted future earnings method calculates the value today (discounted for time) of the businesses earnings in the future. The evaluator must forecast revenues, expenses, profits and cash flows. The appraiser must carefully analyze all factors and uncertainties that can impact a business’s ability to generate future earnings. Risk assessment is the most important aspect of the analysis. The discount rate, which is a percentage number usually between 15% and 100%, quantifies risk. Usually, the applicable discount rate correlates directly with yields on publicly available securities such as treasury bills, shares of publicly held companies or corporate bonds. The higher the discount rate the riskier the business. For small businesses, such as restaurants, liquor stores, convenience stores, bars or cleaners, a variety of other methods, ratios and formulas are used. These methods are unique to the circumstances and usually cannot be supported by straight forward theoretical documentation. Speak to your local CPA or business broker for more information about valuing a business and on your pending purchase or sale.

The Comparable or Guideline Company Approach is a method that the appraiser collects data on recent sales of similar companies and calculates the valuation multiples such as the price to earnings, price to revenue, price to cash flow. It is assumed the valuation multiples derived inherently represent the financial markets expectations of future earnings and assessments of future risk. The appraiser reviews the multiples to determine which ones are applicable to the subject entity. The guideline entity used in the final valuation analysis must bear some very similar behavioral characteristics as those of the subject entity. Speak to your local CPA or business broker for more information about valuing a business and on your pending purchase or sale.

You can request a report from a search company that will check records in the US Patent and Trademark Office, state registers and various other business sources. There usually is a fee for this service. Some companies are: CSC, The US Corporation Company, 1090 Vermont Ave NW, Washington DC 20005, 800 241-6518. Thomson and Thomson, 500 Victory Road, North Quincy MA 02171-3145, 800-692-8833.

SIC stands for the Standard Industrial Classification Code. It is a four digit number assigned to identify a business based on the type of business or trade involved. The first two digits correspond to major groups such as construction and manufacturing, while the last two digits correspond to subgroups such as constructing homes versus constructing highways. A company can determine its SIC number by looking it up in a directory published by the Department of Commerce, or by checking in the SIC book in the reference section of a local library. SBA size standards are based on SIC codes.

DUNS stands for the Data Universal Numbering System. It is a database maintained by Dun and Bradstreet that is used by the Government to identify each contractor and their location(s). This number is required to register with the Central Contractor Register (CCR) that is used by the government's electronic commerce/electronic data interchange (EC/EDI) system called FACNET. You can obtain a DUNS number at no cost by calling Dun and Bradstreet at 800-333-0505.

File Form SS-4. You can file Form SS-4 online. Go to www.irs.gov/businesses and click on Employer ID number. Your local IRS Service Center can also assist you in getting a Federal EIN. Call IRS at 1 800-829-4933.