Buying & Selling a Business

The importance of keeping adequate, legible, complete records cannot be stressed enough. Without records you cannot see how well your business is going and where it is going. All business transactions should be documented with checks or credit cards. Undocumented cash transactions should be avoided if possible. At a minimum, records are needed to substantiate your tax returns under federal and state laws, including income tax and social security and sales tax laws. It also is necessary to substantiate your request for credit from venders or loans from lending institutions. It also is necessary to substantiate your representations and claims about the business should yo wish to sell the business. Speak to your local CPA to set you up on a good bookkeeping system.

The address is www.irs.gov

Some aspects to consider are licenses required, zoning laws and other regulations that vary from state to state and business to business. Depending on the type of business you are running, you may also need establishment licenses, liquor licenses, delivery and or transport licenses. Your local SBA office or chamber of commerce will provide you with general information. You must decide about your form of organization. You must choose to be a sole proprietorship, corporation, s-corporation or partnership. Speak to your local CPA for advice specific to your business and location.

You should initially apply online. Go to www.irs.gov/businesses and click on employer ID numbers. Your local IRS service center can also assist you in getting a Federal ein. The phone number is 1-800-829-4933:

There is no simple answer or formula for evaluating the price of your business. There are business brokers or appraisers that specializes in valuing a business. Some brokers believe that cash flow is the most important factor to consider. Some brokers use one of three possible calculations to determine cash flow. Earnings plus Interest plus Taxes = cash flow. Earnings plus Interest plus Taxes plus Depreciation plus Amortization = cash flow. Earnings plus Interest plus Taxes plus Depreciation plus Amortization plus Owner's Salary = cash flow. Other important factors to consider include competition, industry trends, balance sheet, income statement, gross margins, type and condition of equipment, customer base, growth opportunities for company, owner's role, financial needs and goals, difficulty of someone else learning the business and how other companies of similar size in the industry perform. Speak to your local CPA or business broker to assist you in selling your business.

The Gross Profit Margin measures the percentage of each sales dollar remaining after the business has paid for its goods. The higher the gross profit margin the better and the lower the relative cost of merchandise sold. Sales minus cost of goods sold divided by sales = Gross Profit Margin.

The P/E Ratio reflects the amount investors are willing to pay for each dollar of the business's earnings. The higher the P/E Ratio, the greater the investors confidence in the firm. The P/E ratio represents the "multiple" that the stock market places on the earnings of a company. Market price per share of common stock divided by Earnings per share of common stock = P/E Ratio.

This ratio illustrates the average number of days it takes to collect cash from the business's credit sales. Accounts Receivable divided by (Annual Sales divided by 365). The Average Collection Period is meaningful only in relation to the business's credit terms.

This ratio illustrates how many times your initial inventory is replaced in a year. Cost of Goods Sold divided by Average Inventory = IT Ratio. Also Days in the year divided by the Inventory Turnover Ratio = Number of days in Inventory Ratio. Faster turnovers are viewed as a positive trend. The result is meaningful only when compared to other business's in the same industry or the same business's past inventory turnover.