| A Small Business Is Bought and SoldIS
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| | details of the business
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| THERE A SMALL-BUSINESS OWNER who has
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| | operation.Compliance With the Bulk Sale
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| never considered selling his business?
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| | ActMost States require the seller of a
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| Probably not. Is there an individual with
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| | business to furnish a sworn list of his
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| some money, talent, or an urge for
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| | creditors to the buyer and the buyer to
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| independence (often only the last) who
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| | give notice to the creditors of the
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| hasn't thought about owning his own
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| | pending sale. The purpose of such a "bulk
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| business?The number of small businesses
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| | sale" act is to make certain that the
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| actually bought and sold, however,
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| | seller doesn't sell out his stock in
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| represents only a small fraction of those
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| | trade and fixtures, pocket the proceeds,
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| who have felt these urges. To many
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| | and disappear, leaving his creditors
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| people, the desire to buy or sell is only
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| | unpaid. Compliance with the statute gives
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| a passing thought. Others find various
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| | creditors an opportunity to impound the
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| ways to solve their problems or satisfy
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| | proceeds of the sale if they think it
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| their ambitions. But sometimes an
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| | necessary.Noncompliance or inadequate
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| individual doesn't follow through because
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| | compliance may result in attachment of
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| he finds the prospect of buying or
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| | the property after the sale by creditors
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| selling a business too baffling.The Flow
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| | of the seller and voiding of the buy-sell
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| of Decisions in a Buy-Sell
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| | transaction. The buyer should not close
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| TransactionBUYERS AND SELLERS both seek
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| | the transaction until he has made sure
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| answers to the same question: "What is
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| | that all statutory requirements have been
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| this business worth?" Most people see the
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| | met.Financing the Buy-Sell TransactionIn
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| worth of a business as the total value of
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| | general, the buyer has two options
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| equipment and fixtures, inventory, and
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| | regarding the financing of the business.
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| buildings and land. Important, certainly,
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| | The first basic method of financing is
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| but the sum of these values does not
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| | person investment of the future owner or
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| equal the value of the business.For both
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| | owners of the business. The buyer may pay
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| buyer and seller finding the answer to
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| | cash for the business out of personal
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| this question is the most difficult and
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| | resources, establish a partnership, or
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| at the same time the most important step
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| | sell stock. These forms of financing are
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| in the buy-sell process. But this final
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| | commonly referred to as the use of equity
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| decision reflects many other decisions
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| | or investment capital.The other basic
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| made while the transaction is being
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| | form of financing is through borrowing or
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| considered. In other words, the buy-sell
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| | the establishment of credit. This method
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| process is a flow of decisions. It would
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| | of financing may or may not require the
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| be impossible to point out every decision
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| | payment of interest, but it does require
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| that must be made, but the basic ones are
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| | the borrower to repay the principal,
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| as follows:- Motivation: a decision to
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| | usually over a stipulated period of time
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| attempt the sale or purchase of a
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| | or on a specific date. This method of
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| business.
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| | financing is commonly referred to as the
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| - Contact: a decision on how to find a
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| | use of debt capital. Often the purchase
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| buyer (or seller) for a business with
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| | is made through a combination of equity
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| specified characteristics.
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| | and debt capital.Equity capital. In the
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| - Information: a decision on what
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| | simplest form of purchase, the buyer pays
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| information must be gathered or given to
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| | the full purchase price in cash. The
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| buy or sell a business.
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| | buyer's investment in the business, at
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| - Sources: a decision on how, where, and
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| | least initially, is full and complete.
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| at what cost the needed information can
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| | Whether the funds come from one person or
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| be obtained.
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| | more than one, the financial nature of
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| - Analysis: a decision on the meaning,
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| | the transaction does not change.The
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| importance, and reliability of the
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| | sources of equity capital are many and
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| information gathered.
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| | varied. Generally, they are in the form
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| - Value: a decision on what the business
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| | of bank savings. Or cash may be obtained
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| is worth. Price: a decision on how much
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| | from liquidating certain assets the buyer
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| money to take or give for the business.
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| | may own, such as surrendering life
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| - Financing: a decision on how to pay or
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| | insurance policies for cash value or
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| receive the purchase price.
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| | selling real estate, stocks and bonds, or
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| - Contract: a decision on the form and
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| | other assets.Before disposing of assets,
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| content of the contractual relation.
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| | however, the buyer should ask himself
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| - Implementation: a decision on how and
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| | this question: "Do I want to buy the
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| when to effect transfer of ownership.How
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| | business more than I want to keep these
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| important is management ability in this
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| | assets, considering both present and
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| business?Occasionally, a business that is
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| | future values?" For instance, if the
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| unique and very simple almost manages
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| | buyer cases $16,000 worth of government
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| itself. But if the business is in a
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| | bonds, there may be a possibility of his
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| competitive field, management ability is
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| | making a higher profit, but the risk of
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| probably the most important requirement
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| | losing his investment entirely will be
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| for success.Does the prospective owner
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| | greater. He should be as certain as
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| have the ability to manage
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| | possible that the expected return is
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| successfully?Effectiveness with people
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| | worth the risk.An equally important
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| (customers and employees), eagerness to
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| | question is how much the buyer should
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| tackle difficult problems and make
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| | invest in the business. In general, the
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| decisions, and intelligence about general
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| | more he invests himself, the better
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| business operations are key ingredients
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| | chance he will have of borrowing at least
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| in management ability.Can he/she learn
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| | part of the purchase price.A buyer may
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| how to manage this business?Most people
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| | not have the capital, however, nor
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| can learn to manage if they recognize the
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| | perhaps the inclination, to purchase the
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| need. This requires room to make
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| | business outright with his own personal
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| mistakes, however, and the
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| | funds. How far he goes in this respect
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| self-discipline to undertake
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| | depends on his own cash resources, his
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| self-improvement programs.ValueA business
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| | confidence in the business, and his
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| has a purpose. That purpose is to provide
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| | ability to borrow money or establish
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| a satisfactory return on the owner's
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| | credit with others.Debt capital. In most
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| investment. Consequently, determining
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| | cases, the buyer of a small business will
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| value involves measuring the future
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| | have to borrow money or establish credit
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| profit of the business being sold.A
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| | to purchase the business. Several factors
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| seller often thinks of value as
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| | will affect the use of debt capital for
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| representing the money he has invested
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| | this purpose: the source of capital, the
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| through his years of ownership. A buyer
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| | amount that can be borrowed, and the
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| is tempted to consider value as a fair
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| | length of time for which the capital can
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| price for tangible items such as
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| | be borrowed.Commercial lending
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| equipment and inventory. These factors
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| | institutions are the sources to which the
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| are important, but they have value only
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| | buyer will probably turn first. The
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| to the extent that they contribute to
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| | availability of financing through these
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| future profits. An owner may have
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| | sources depends on the security that can
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| invested $40,000, the tangible assets may
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| | be pledged to the loan, the profit
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| have a current worth of $20,000, but it
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| | potential of the business, the prospect
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| is the profit potential that establishes
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| | of repayment of principal and interest,
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| the value of the total business.Assuming
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| | and the general availability of
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| that a reliable estimate of future profit
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| | credit.One of the major difficulties
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| is made, how much is to be paid for each
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| | facing the buyer at this point concerns
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| dollar of profit potential?What am I
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| | the collateral that can be pledged as
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| buying (or selling)? Is it a business or
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| | security. The physical assets of the
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| a building full of equipment and
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| | business--particularly fixtures,
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| inventory?What return would I get if I
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| | equipment, and land and buildings--will
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| invested my money elsewhere--in stocks,
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| | not be available for security unless they
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| bonds, or other business
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| | are free of other financial obligations.
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| opportunities?What return should I get
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| | The buyer may be forced to look to his
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| from an investment in this
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| | own personal assets, such as cash value
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| business?PriceIt might seem that the
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| | of life insurance, stocks and bonds,
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| price to be paid or received for a
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| | mortgages on real property, and so
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| business would simply be equal to the
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| | on.Less formal sources of debt capital
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| value. However, value refers to what a
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| | may be open to the buyer, such as loans
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| business is worth; price refers to the
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| | from friends, relatives, business
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| amount of money for which ownership is
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| | associates, and the like. Many small
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| transferred. There is usually a
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| | businesses have been financed through
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| difference between price and value
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| | such means.The seller as lender. A common
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| because the buyer and seller differ as to
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| | source of debt capital is that supplied
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| how much the business is worth. The price
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| | by the seller when he lets the buyer pay
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| will represent negotiation and
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| | for the business over time. Why should
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| compromise.Here are two suggestions for
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| | the seller finance the buyer? Probably
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| fruitful negotiation:- Discussion between
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| | because the desire to sell is strong
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| buyer and seller should focus on the
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| | enough so that the seller is willing to
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| future profit performance of the firm.
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| | assume part of the risk.As in financing
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| Since expected profit is basic to
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| | from other sources, the seller usually
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| determining value, it can be a valuable
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| | demands that the buyer pay interest on
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| point for negotiation.
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| | the amount being financed and repay the
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| - Every profit projection includes some
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| | principal and interest at stipulated
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| assumptions and risks. Generally, the
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| | periods. The seller usually establishes
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| less firmly based the assumption and the
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| | his security on the more certain assets,
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| more apparent the risk, the less value an
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| | such as fixtures and equipment. However,
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| expected profit can support.
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| | he may also assume the inventory as
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| Consequently, identifying and analyzing
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| | acceptable security without placing it in
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| risks involved in future operations can
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| | a bonded warehouse.The seller's
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| make discussions between buyer and seller
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| | philosophy toward financing the buyer
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| more significant.These two points will
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| | seems to be that if the buyer should
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| help bring negotiations about value
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| | fail, the seller can take back the
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| toward a mutually acceptable
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| | business. The major problem in this form
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| price.Sources of Financial
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| | of financing is that it is harder for the
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| InformationBOTH BUYER AND SELLER are
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| | buyer to get additional financing from
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| interested in financial information,
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| | other sources when the seller has first
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| affecting the buy-sell transaction.
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| | claim on the assets of the business.How
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| However, since the seller already has
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| | much to borrow. As the first step toward
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| this information, it is a major
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| | financing the purchase of a business, the
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| requirement for the buyer to get and make
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| | buyer has to find answers to two
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| use of as much of it as possible.The
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| | questions:1) How much do I need to
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| buyer can usually find financial
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| | borrow?"
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| information in the following places: (1)
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| | 2) "How much can I afford to borrow?"The
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| financial statements, (2) income-tax
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| | answer to the first question depends
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| returns, (3) other internal records, and
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| | partly on how much money the buyer has
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| (4) other external sources.Financial
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| | and how much he is willing to invest in
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| StatementsThe results of the financial
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| | the business himself. The less equity
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| transactions of every company should be
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| | capital he has, the more debt capital he
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| reflected in its periodic financial
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| | needs.How much he can afford to borrow
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| statements. These statements are
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| | depends on his ability to keep up
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| extremely important in buying or selling
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| | principal and interest payments. If a
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| a small business. They were prepared for
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| | buyer borrows from a number of sources,
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| the seller, of course, and their contents
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| | he may find himself committed to a
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| are available to him. But the buyer, too,
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| | repayment schedule that the profits from
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| should be aware during the early stages
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| | the business will not support. His
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| of a buy-sell transaction of the
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| | borrowing plans should be related to the
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| information contained in financial
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| | projected income statement prepared
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| statements.Balance sheet and income
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| | during his study of the business under
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| statement. The balance sheet is a
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| | consideration.Operating capital. In
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| statement of the financial position of
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| | addition to funds for purchasing the
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| the business at a given moment in time.
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| | business, the buyer must have enough
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| The income statement is a summary of the
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| | working capital to cover the cost of
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| revenue and expenses of the business
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| | operation until the business itself
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| during a specified period of time. These
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| | produces enough cash. In other words, the
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| financial statements show only the past
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| | buyer must think in terms of cash
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| results of the company's transactions.
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| | requirements and cash flow for weeks and
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| The results of future operations may or
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| | months ahead. A common mistake in buying
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| may not be similar.Balance sheets and
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| | a business is failure to provide adequate
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| income statements in themselves contain
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| | working capital.If sales and business
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| important information, but they are most
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| | costs after purchase of the business are
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| useful when a professional accountant
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| | expected to follow the pattern of the
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| makes a detailed analysis of them. A
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| | immediate past, the need for short term
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| complete analysis includes a review of
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| | working capital should not be hard to
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| the manner in which the statements were
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| | estimate.Putting a Value on
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| prepared, and perhaps also a review of
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| | GoodwillGoodwill, when it exists, is a
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| the records and control features of the
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| | valuable asset. It may result from a good
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| accounting system. This is especially
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| | reputation, a convenient location,
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| important in a small business buy-sell
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| | efficient and courteous treatment of
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| transaction because the financial
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| | customers, or other causes. However,
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| statements of smaller companies are not
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| | because it is intangible and difficult to
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| usually as professionally prepared as the
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| | measure, goodwill is sometimes recorded
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| statements for larger companies.Audited
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| | when it does not exist.From the
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| statements. In many buy-sell
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| | accountants' standpoint, goodwill should
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| transactions, the statements are supplied
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| | be recorded only when it is purchased. It
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| by the seller, but the buyer reserves the
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| | should not be recorded otherwise, they
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| right to conduct an audit of the seller's
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| | believe, because of the difficulty of
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| records. Or the buyer insists that the
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| | placing a fair value on it.As a practical
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| seller "warrant" his financial
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| | matter, above-average earnings are
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| statements. Warranty of financial
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| | normally considered the best evidence of
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| statements by the seller should be
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| | the existence of goodwill, and the value
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| accepted with caution, however, because
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| | placed on the goodwill at the time of its
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| there does not seem to be any uniform
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| | sale is often determined by capitalizing
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| definition of the term warranty.If the
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| | these extra earnings. Take, for example,
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| seller's financial statements are
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| | a business in a field in which the normal
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| prepared by an independent accountant,
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| | return on investment is 10 percent.
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| the statements should show whether they
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| | Suppose the business has a capital
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| were (1) prepared after an audit of the
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| | investment of $200,000 and an annual
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| seller's accounts, or (2) prepared from
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| | return of about $24,000. The average
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| the seller's records without verification
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| | return on $200,000 for this type of
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| by audit. If they were prepared without
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| | business would be $20,000 a year.
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| verification by audit, they may be quite
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| | Therefore, the business has above-average
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| similar or even identical to statements
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| | earnings of $4,000 yearly.Capitalizing
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| that would have been prepared by the
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| | these above-average earnings at 10
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| seller's own bookkeeper. If they were
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| | percent ($4,000 div. by .10) gives
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| prepared after an audit, they should
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| | $40,000 as the investment needed to earn
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| include a statement of the accountant's
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| | the $4,000. Therefore $40,000 may be
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| opinion.Financial statements prepared
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| | taken as the value of the goodwill of
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| without such an audit may or may not
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| | this firm.Many people feel that unless a
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| reflect the financial position or results
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| | business has above-average earnings, it
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| of operation of the company. Most small
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| | does not have goodwill. Thus, a business
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| companies do not have their records
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| | might appear to have an excellent
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| audited annually, but without an audit it
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| | location, enlightened customer policies,
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| is impossible to tell how accurate the
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| | and a superb product; yet this business
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| statements really are.Another point the
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| | will not have goodwill attaching to it
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| buyer should consider is the cutoff
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| | unless its earnings exceed the normal
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| period for the financial statements. The
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| | earnings for that type of business.The
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| statements may have been cut off during
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| | measurement of goodwill has many
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| the low period of the sales cycle or
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| | pitfalls. To begin with, a decision must
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| during the high period. This has some
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| | be made as to what normal earnings are.
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| bearing on the financial position
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| | (Industry averages will probably be
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| reflected in the statements.Risk and
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| | available, but average earnings for the
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| Return on InvestmentIf a buyer wants to
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| | industry aren't necessarily normal
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| invest money in a business that is being
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| | earnings.) And once this decision has
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| sold, he should be concerned about
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| | been made, the percent at which the
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| receiving a fair return on his
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| | above-normal earnings will be capitalized
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| investment. Many businesses can make a
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| | must be decided. In the example given, 10
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| profit for a short time (1 to 5 years);
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| | percent was used. This means that the
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| not so many operate profitably over a
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| | buyer should recover his investment in 10
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| longer period of time.From the buyer's
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| | years. If he wants to recover his
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| point of view, what is a fair rate of
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| | investment more quickly, he will want to
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| return from an investment in a small
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| | use a higher percent, which will give a
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| business? The rate of return is usually
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| | lower capitalized value. If he is willing
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| related to the risk factor--the higher
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| | to wait longer, he will accept a lower
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| the risk, the higher the return should
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| | percent, which will raise the capitalized
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| be. United States Government bonds are
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| | value.Goodwill is simply a bookkeeping
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| the safest investment--the rate of return
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| | device to represent the value of one part
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| ranges from 5-1/2 to 6 percent. Blue-chip
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| | of a business when that business is
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| stocks and corporate bonds usually give
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| | valued as a whole. In most cases, the
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| the investor a return of 4 to 10 percent
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| | total value of the business is decided
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| if both dividends or interest and
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| | without a detailed calculation of the
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| increase in market value are considered.
| |
| | goodwill figure--in many cases, without
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| Speculative stocks may have a higher
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| | even detailed consideration of the value
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| return, but they also have a higher risk
| |
| | of the other assets.In the ensuing
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| factor.The buyer of a small business
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| | chapters, we will develop an in-dept
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| should try to determine the risk factor
| |
| | strategy to find, value and acquire a
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| of the new business, though this is
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| | business using as little of our cash as
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| difficult at best and in many cases
| |
| | possible. This is not a book that you
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| impossible. In attempting to assess the
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| | read and put down. This is a workbook, a
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| risk factor, the buyer should project the
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| | work-in-progress type manual. We
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| profits of the business as far into the
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| | recommend that the reader takes action as
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| future as possible. He should ask himself
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| | he/she goes through the information
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| how high the risk should be normally and
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| | enclosed. That is the only way to
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| look for conditions that would be likely
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| | successfully become a small business
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| to affect the sales and profit-making
| |
| | owner. And by duplicating your efforts,
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| capability of the business.Financing and
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| | you can repeat the process outlined in
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| Implementing the TransactionTHE BUYER AND
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| | this book to build a small empire.Rudy
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| SELLER have a number of important matters
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| | LeCorps and his wife are the owners of
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| to attend to before the transaction can
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| | various businesses, including a Car
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| be closed. The seller will be thinking
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| | Rental Franchise and a Publishing
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| about instruments of transfer that must
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| | company. He also works full-time for a
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| be delivered at the closing, about
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| | large Wall Street Investment Bank.On the
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| compliance with the bulk sale act, and
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| | entrepreneurial front, his main focus is
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| possibly about making financial
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| | small business productivity. RGL
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| arrangements if the buyer can't raise the
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| | Publishing, the publishing company he
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| purchase price. The buyer's attention
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| | founded, is a publisher and distributor
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| will be focused on financing
| |
| | of books, eBooks and application
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| arrangements, organizing his
| |
| | software, whose purpose is to help
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| business-to-be, overseeing the seller's
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| | increase small business productivity,
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| operation of the business in the
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| | efficiency and success.
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| meantime, and becoming familiar with the
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| |
|
