Small Business

Why are you selling your business? How many years have you been in business? How many years have you been in business at the present location? Did you create the business or did you buy the business from someone else? Do you have a formal sales agreement prepared that I could have my lawyer look at? Are you a sole proprietorship, partnership or S or C corporation? Do you have tax returns and financial statements that my local CPA can look at? Which bank do you do business with? What types of insurance must your business carry? How many hours did you work per week in your business? How many employees do you have? Do family members work in your business? Will the family members stay after the sale? What type of entity are you? Are you willing to take a note and be paid over time instead of all at once? Will you stay and work for a while after the business is sold? How is inventory controlled? How often do you take a physical inventory?

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.

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.

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.

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.

Subject to certain exceptions sole proprietorships, C and S Corporations, Partnerships and 1041 Fiduciaries must file Form 8594 when a business is sold inclusive of goodwill. Speak to your local CPA about the Form 8594 requirements.

The cost of business intangibles such as Goodwill, covenants not to compete amounts, trademarks are amortized over a 15 year period. Most intangible assets are expected to benefit more than one year, so their cost is a capital expenditure under Internal Revenue Code section 167 (depreciation), the primary authority for deducting intangibles