Small 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.

Some variables that may be negotiated to complete a deal is; the amount of the down payment, the interest on a note taken back, the time the seller is willing to carry the note, all cash verses cash and note deal, the possibility of a consulting contract for the seller as part of the purchase price.

The cash flow statement provides a summary of the firm's operating, investment and financing cash flows and reconciles them with changes in its cash and marketable securities during the period of concern. The cash flow statement is sometimes called a source and use statement. This statement will reveal whether or not the cash generated by the business is enough to pay the principle and interest on the financing required to buy the business.

Does the franchise give you an exclusive territory for the length of the franchise period, or can the franchiser sell other franchises in your territory? Under what circumstances can you end the franchise contract, and at what costs to you? How many years has the firm offering you the franchise been in operation? If you sell your franchise, will you be compensated for your goodwill or will it be lost to you? Does the company offering you this franchise have a reputation for honesty and fair dealing among its franchisees? Has the franchiser shown you any certified figures indicating exact net profits of one or more of its members, and have you personally checked the figures with these people? Will the franchiser assist you with: a) A management training program? b) An employee training program? c) A public relations and advertising program? d) Capital? e) Credit? f) Merchandising ideas? If needed, will the franchiser assist you in finding a suitable location? Is the franchising firm adequately financed so that it can carry out its stated plans? Does the franchiser have experienced management, trained in depth? What can the franchiser do for you that you cannot do for yourself? Has the franchiser investigated you carefully enough to assure itself that you can successfully operate at a profit to both of you? Does your state have a law regulating the sale of franchises, and has the franchiser complied with that law to your satisfaction? How much equity capital will you need to purchase the franchise and operate it until your income equals your expenses?

The gross profit on inventory is divided by the average profit of the inventory. Low end items may be marked up 500% while a high end is only 30%. Usethe average profit across all inventory items. If the average is 10, that means for every dollar you invested, you earned $10 more in profit.

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.

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.

Generally, both the buyer and seller of a group of assets that make up a trade or business must fill out IRS Form 8594 to report the sale if goodwill or going concern values are involved. The sales price is allocated among the transferred assets using the residual method formula (proportion of sales price to an assets fair market value at date of sale) in a specific order set out on Form 8594. Speak to your local CPA about the sale of your business.