Small Business

You should always try not to sign personally if you don't have to. However the seller or the bank will usually request your personal guarantee on any note. The more money down and collateral at risk, the less likely, and your personal signature will be required. A good CPA can negotiate and work with your lawyer to minimize your personal exposure.

Quite often, a seller of a business is willing to hold a note for a portion of the business purchase. When the seller holds paper or this note, the purchase of the business is facilitated since the buyer does not have to go to traditional lending sources.

The CPA usually is involved with the allocation of the assets to the purchase price. When a business is acquired, the business being purchased can include various assets including machinery, inventory, fixtures and intangible assets. The allocation of these assets is important because certain assets can be depreciated or written off faster than others.

Bulk sales tax is a tax paid by the buyer on certain tangible assets including furniture and fixtures.

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.

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.

A college professor was overheard telling his class, "There are three basic principles for a successful business, location, location, location". You can have the best business in the world, but if it is located in a desert, your business will probably fail. Time and effort devoted to selecting your business location will mean the difference between success and failure. The kind of business you are in, the potential market, the availability of employees and the number of competitive businesses in your neighborhood should all be determining factors in your choice of location.

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.

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.