May 8th, 2008 quantum
By searching through libraries, websites, associations, competitors and affiliations you can gather some very useful information. While conducting your research you will be searching for answers to the following questions:
- How big is the market?
- Is it expanding or shrinking?
- What key publications and other media are being used to advertise?
- What are the advertising costs?
- Who are the competitors (check the yellow pages and conduct local or regional internet searches)?
- Is the subject business competitive?
- Where does the subject business fit amongst the competition?
- What is the competition spending on advertising?
- Where is the competition advertising?
- Are there any major growth areas?
- Are there any new product trends?
- What are the industry distribution channels?
- What sales/marketing applications are being used within industry?
- Who is the industry/market leader?
- Where is this business ranked within the industry?
The above represents a sample of the type of questions that will help you gain relevant insight into the business that you are interested in buying and the industry in which it operates.
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April 8th, 2008 quantum
Buying a business requires a major commitment on a buyer’s part. Not only will it have a financial impact, but it will likely produce a significant life-style change. The buyer’s life is certainly influenced by how he or she earns a living. Most people purchase existing businesses to achieve one or more of the following objectives:
• Quick return on investment
• Instant cash flow
• Obtain a business with an established credit history and existing vendor relationships
• Trained employees
• Established customer base and reputation.
• To secure a long-term job.
Obtaining a good business at a great price should be your goal (if you acquire a “great” business, then more often than not, you will be forced to pay a huge premium since you are paying for the past and not what the what the business is capable of in the future). Therefore, it is usually preferable to purchase a good business and then make it great. Achieving a great price requires being respectful of the business accomplishments of the seller while using objective facts to disprove the seller’s calculation of the list price. In addition, there are numerous other factors that come into play, including the manner in which you structure the purchase, your ability to “finance” the purchase price, the cost of money in the financial market, current industry expectations, marketplace demand and last but not least, being in the right place at the right time.
Another important aspect that shows the commitment and sincerity of a buyer is the preparation of all the necessary documents before hand. Remain organized throughout the process of identifying and focusing on a business to purchase. For each business opportunity you identify, maintain a file with the following categories:
1. Accounting and Financial Section
2. Owner Questions Section
3. Sales Section
4. Marketing/Advertising Section
5. Industry Information Section
6. Competition Section
7. Customers Section
8. Personnel Section
9. Suppliers/Vendors Section
10.Licenses/Permits/Filings Section
11.Offer To Purchase Section
12.Legal Section
13.Due Diligence
14.Other Section
15.Financing Section
Approaching the challenge of identifying and then acquiring a good business requires the right outlook and proper preparation. Rely upon Quantum’s Buyer Program to guide you through the Business buying procedures toward finding a lucrative business opportunity.
Visit Quantum™ Blog and know more about the complexities involved in a business deal.
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March 17th, 2008 quantum
Once a particular business appeals to you, it becomes imperative to acquire certain details about that business opportunity. Therefore, ensure you conduct extensive research and seek vital information before devoting your time and resources or any focused attention on any one business opportunity. A sampling of some of the information to obtain includes:
In addition to determining the business location, asking price, gross revenues and available cash flow, determine the value of Furniture, Fixtures & Equipment and inventory and whether they are included in the asking price. Determine whether seller financing is available and the likely amount of the required down payment. Other relevant information to consider includes: (1) the year the business was established, the number of employees and the monthly payroll, (2) whether the business is relocatable, (3) the nature and extent of seller training and support, (4) the seller’s reason for selling, (5) the condition of the business facilities, (6) the market outlook and level of competition, (7) growth and expansion possibilities, (8) the lease terms available to you as the buyer.
After reviewing detailed information, if you wish to continue pursuing a particular business opportunity, then utilize the services of a competent business broker to represent you as your exclusive agent. Most reputable business brokers representing the seller will cooperate and “share” their commission with the business broker representing the buyer. Accordingly, the buyer can often obtain “free representation” through the Broker Cooperation arrangement. Following this methodology will ensure that you acquire a business that represents a valued investment.
To learn more, visit us at www.QBSNet.com
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March 11th, 2008 quantum
We are Business Brokers that work closely with a group of institutional lenders (both SBA and Non SBA) that specialize in financing new business purchases so that our qualified buyers are able to consummate a purchase to which they are otherwise committed. Toward that end, our business brokers can assist you by compiling various financial information and records and obtain pre-qualification for third-party financing.
In order to obtain third-party financing, a lender will typically require that the business demonstrate a history of financial earnings performance and the business buyer must establish that he or she has the background and experience to ensure the continuity of the business in the future since most lenders are concerned with the financial performance of the business under the leadership of a new owner. Furthermore, the lender will likely want to collateralize the loan with the assets of the business, the buyer’s personal assets, or both. Realize that anything of value that the business owns can be used as collateral and the faster those assets can be converted to cash, the more attractive they are to the lender. Thus, accounts receivable will have greater value to a lender than equipment because it can be converted to cash easier and usually at the pre-determined amount assigned by the lender; whereas equipment and machinery will be more difficult to liquidate and therefore, the lender may only assign a liquidation value to these assets. In any case, most lenders will have guidelines by which they discount the assets for collateralization purposes.
Determine the Amount of Working Capital Necessary to Fund the Business
The financial requirements of the new business may be greater than the amount you need to complete the purchase. Whether this working capital comes from you personally or from a lender, it is a typical rule of thumb that you have enough working capital available to cover three months of operating expenses assuming a fifty percent decrease in gross revenue as an extremely conservative precaution. Therefore, if you are currently employed and own your own home, you should consider applying for a home equity line of credit while employed and your current employment is available as a credit reference. You will not incur any interest expense until you draw upon the line and it will be available later when and if you need it.
Some of the options available for a buyer to consider are enlisted below:
1.Seller Financing
Most small business purchases involve seller financing, which includes the seller financing a part of the purchase. Generally a seller only gets involved in financing the purchase if he is certain about the viability of the business in the future.
2.Small Business Administration (SBA) Financing
The Small Business Administration was established to help grow the economy through loans to small businesses for acquisition as well as expansion. The SBA web site (www.sbaonline.sba.gov) is a great resource to small business owners. The SBA will finance up to 70 percent of the purchase payable over 10 years. They will also provide funding working capital and have separate programs to fund machinery purchases as well as real estate.
At Quantum™ Business Solutions Network, accountants and financial experts provide the necessary guidance to buyers in financing the purchase.
Visit our website, www.QBSNet.com
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February 24th, 2008 quantum
Further to our last blog post regarding income taxes, the business buyer and seller must also pay attention to sales tax and property tax considerations.
Sales Tax Considerations:
When a business is sold, the seller typically transfers two types of tangible personal property to the buyer: (1) equipment and furniture, and (2) stock in trade and merchandise. Because the stock in trade and merchandise of the business is usually sold to the buyer for purposes of resale in the regular course of business, the sale of that type of property is not taxable as a retail sale. However, because the State Board of Equalization may presume that all gross receipts are subject to sales tax and the seller has the burden of proving that a sale of tangible personal property is not a retail sale, the seller should always obtain a resale certificate from the buyer. Because the other business assets, such as furniture and equipment, are not generally sold for resale, the gross receipts from their sale are subject to taxation unless they are ”intangible” or otherwise exempt under the Revenue and Taxation code. A common exemption available to some taxpayers relates to “occasional sales exemption” which is a sale of business furniture and equipment used in a business that does not involve retail sales – i.e., the taxpayer conducts an activity (providing a service) for which a sales tax permit is not required. Although the seller must report any taxable proceeds on his or her final sales tax return this tax is often chargeable to the buyer.
Property Tax Considerations:
If the sale of the business includes the real property on which the business is conducted (or personal property that is affixed to the real property), the buyer faces property tax consequences. All property in California is subject to property taxation at its full value on an annual basis.
Therefore, in order to conduct a smooth transaction, it is very important for a business seller and the business buyer to consider implications of both Sales and Property Tax.
For expert advice on business selling and business buying, keep visiting Quantum™ Blog.
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February 20th, 2008 quantum
In order to effectively negotiate and structure the sale of your business, you need to be aware of the tax impact of the transfer and how to minimize your liability. Summarized below are the income tax considerations that apply to the sale of a business. Your own tax adviser should assist you in applying these considerations to your specific situation.
Income Tax Considerations
The rules for computing the income taxes with respect to the sale of your business is extremely complex and it is important to obtain sound tax advice early in the sale process and before you enter into a binding purchase and sale agreement so that you can avail yourself of tax-savings opportunities.
In considering the income tax consequences of the sale of a business, several factors need to be considered:
- Whether your business is conducted individually or through an entity
- If you conduct your business through an entity, how the sale is structured – i.e., whether you sell the entity or the entity sells the assets
- Whether you receive the sales price in a lump-sum or in installments
- If an asset sale, how the sales price is allocated among the different categories of assets - an intricate process (see below).
- Whether any of the consideration received from the sale is paid as compensation for future consulting or employment services
These factors will dictate which of the four separate tax rates will apply to the proceeds of the sale. An overview of the applicable rates is as follows:
1.) Ordinary income rates - The highest marginal tax rate is 35 percent.
2.) Long-term capital gain rate – This rate applies to the gain from the sale of a capital asset which has been held for more than 1 year (if held less than 1 year, it is taxed as a short-term capital gain and the ordinary income rates apply) and is generally 15 percent.
3.) Real Estate Depreciation Recapture Rate – This rate is 25 percent and only applies if you’re selling real estate as part of the sale of your business.
4.) Corporate Income Tax Rate – The corporate income tax rates range from 15 to 39 percent; in addition, the owner then pays individual income taxes upon receipt of the sale proceeds in the form of a corporate distribution – hence, there is “double taxation” when a C corporation sells appreciated assets and then distributes the proceeds to its shareholders.
Note that if instead of the corporation selling its assets, the C corporation shareholder sells her stock of the company held more than a year (i.e., an “entity sale”), there will be only a single tax of 15 percent – the long-term capital gain rate. If this is not possible, because the buyer insists upon an asset sale, fortunately, your exposure to “double taxation” can sometimes be somewhat minimized by again, structuring the transaction in a certain manner (for example, by having a percentage of the sale proceeds paid to you individually for a covenant not to compete or for consulting). There is also the possibility of converting a C corporation to a Sub-Chapter S corporation prior to the sale (which might eliminate your exposure to a double tax); however, there may be exposure to tax at the highest corporate income tax rate if the corporation held assets, prior to the conversion, with a fair market value greater than their tax basis.
By reviewing the tax consequences in advance and presenting the proposed sale structure in a certain manner, you have a better chance of completing the sale on your terms and conditions.
For more information on the Sale of business, keep visiting Quantum™ Blog.
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February 10th, 2008 quantum
The most appropriate valuation method applied by qualified Business Brokers for valuing a small business (defined as a business with annual sales of $5 million or less) - is an Income Based Valuation.
An Income Based Valuation approach can be broken down into four generally accepted methods as follows:
- Present Value of Future Earnings
- Gross Revenue Multiples
- Capitalization of Excess Earnings
- Multiple of Discretionary Earnings
The valuation method applied by most qualified business brokers or business appraisers for businesses for sale will likely be a combination of both the widely used and professionally accepted Capitalization of Excess Earnings method and the Multiple of Discretionary Earnings method. This is a powerful way of estimating the value of a business and allows for the business to be fairly valued as an investment opportunity without many of the uncertainties that other valuation methods introduce. This method assumes that a business owner is entitled to a fair return on the value of the business (his/her investment) over and above his/her fair wage (if the owner(s) works in the business). This combined approach will assign a financial value to the company’s reconstructed earnings (resulting in available discretionary earnings) that are reflective of the risk associated with the continued operation of the business in light of recent proven financial results that can reasonably be expected to continue after the business purchase for an indefinite but substantial duration.
Using the two valuation methods described above also enables one to calculate the goodwill value in the business as well as its estimated fair market valuation. Furthermore, this approach works equally well whether the business to be purchased is operating as a sole proprietorship, partnership or as a corporation. Thus, these valuation methods are based on the income a business has proven it can earn with the expectation being that the recent level of actual earnings of the business will continue at or above that level for some reasonable period of time. The estimated fair market value of the business based on its proven earnings will be strongly affected by applying a factor (a return on investment multiplier/capitalization rate) taking into account the projected risk and certain investment considerations associated with new ownership.
It is always beneficial to obtain and Income Based Valuation method as an accurate reflection of the List Price and is often relied upon by most buyers to justify their acquisition.
Keep visiting, Quantum™ Blog for more advice on business buying and selling.
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January 30th, 2008 quantum
The final part of our Seller’s checklist series includes all those details that are not included in first 5 parts posted to our blog earlier. Following is a list of items which should be addressed and included as part of the materials provided to a prospective buyer.
Miscellaneous:
- Business Insurance (provide copies of the policy statements or declarations page), including:
□ Group hospitalization and medical
□ Malpractice or Errors and Omissions
□ Workman’s Compensation
□ Business automobile
□ Life (key person and employees)
□ Health and disability
- Any collective bargaining agreements
- Employee stock option plans
- Accumulates sick leave and vacation liabilities
- Severance pay agreements
- Pension Plans
- Simplified Employee Pension Plan (SEP)
- Keogh plans
- 401 (k) plans
- Deferred benefit plans
- A description of any business community involvement
This creation of a prospectus or Sales Memorandum incorporating the various materials from the six part “Seller’s Checklist offers a presentation that educates the buyer on the many intangibles inherent in your business, hence raising the perceived value to the acquirer and communicates to the buyer that the business is well organized and easily transferable. These intangibles include among others, name recognition, market niche, vendor relationships, operation and production systems, distribution channels, customer loyalty and trained and skilled employees.
Thus, the creation of the Prospectus or Sales Memorandum presents the business as unique market opportunity with huge potential for growth and expansion thereby streamlining the process of selling your business.
Key Points To Consider:
• Disclose all relevant information – even negative facts. A buyer wants to be able to trust you. Any indication that you’re not truthful or that you ailed to disclose all pertinent information can put off an otherwise interested buyer. Realize that during the due diligence stage of the purchase a savvy buyer will likely investigate all aspects of your business and discover negative facts anyway.
• Ensure that the business premises are well organized and in good shape. First impressions are very important. At some point, an interested buyer will want to visit the business location and it is important o ensure that you create a good impression. How you maintain the business premises will go a long way toward communicating that the business itself is well organized and running efficiently. Therefore, apply fresh coat of paint, make minor repairs (especially if the repairs are the responsibility of the landlord) and organize and clean the premises.
Keep visiting Quantum™ Blog for more valuable business brokerage assistance.In addition, you can discuss this topic on our forum - www.qbsnet.com/forum - by opening a thread.
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January 26th, 2008 quantum
Continuing from the last post … this item in the checklist educates the buyer about the intangible inherent in the business being sold, raising the perceived value to the acquirer, and communicates to the buyer that the business is well organized and easily transferable. Intangibles include among others, name recognition, market niche, vendor relationships, operation and production systems, distribution channels, customer loyalty and trained and skilled employees.
Financial and Business Forecasts are often necessary when the business to be sold is a start-up or has little operating history to enable the buyer to formulate a business plan and justify growth and expansion of the business in the future.
Following are the things that should be included under Financial and Business Forecasts:
1. Pro forma financial statements for the next three (3) years
2. Planned new products or services
3. Potential new business markets and any supporting documentation
4. A description of any emerging new technology to be exploited
These points if covered in the checklist provide the buyer guidance and support the multiple upon which the the selling price is based.
Quantum™ Business Solutions Network, offers guidance at every step of a sale process.
Keep visiting Quantum™ Blog for more information on business sale and purchase transactions.
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December 24th, 2007 quantum
The list price for a business is usually a multiplier of Seller’s Discretionary Earnings or “SDE.” In order to prepare adjusted financial statements and determine SDE, an audit trail must be created to support representation of the Seller during due diligence. Toward that end, below is a partial checklist of items to assemble once you commit to the sale of your business.
Following things should be included in financial history:
1. Profit and loss statements for the previous 3 years
2. In order to establish the true earning capacity or cash flow for the business and
demonstrate how profitable it truly is - review each expense item reflected on the
yearly profit and loss statements requested above and create a schedule of all the
unnecessary items not essential to operate the business. These include all
“discretionary,” (owner perks and benefits such as automobiles, boats and planes
for personal use, excess or unnecessary labor or salaries [i.e., family members on
the payroll], unnecessary travel and entertainment, contributions to retirement or
personal insurance plans and extraneous personal or unnecessary expenses
including telephone, repairs, etc.) “non-recurring” (moving expenses)
“extraordinary” (gain or loss from the sale of business equipment) or “one-time”
(equipment purchases not made in the ordinary course of operating the business)
expense items
3. Balance Sheets for the previous year
4. Copies of all documentation related to the ownership of intellectual property including the establishment of all copyrights, trademarks, service marks,trade names and patents
5. Contracts
- Janitorial and maintenance contracts
- Landscaping contracts
- Telephone answering service or other service contracts
- Order fulfillment service contracts
- Uniform and laundry contracts
- Fuel service contracts (bulk oil, propane, etc.)
- Advertising and marketing contracts
6. A schedule of business long-term liabilities, including:
- Real estate loan documents
- Promissory notes, outstanding lines of credit, etc.
- A schedule of any outstanding officer’s loans, including supporting documentation, if any
7. Web site statistics, including: (a) percentage of organic versus pay per click traffic (b) conversion rate, (c) list of search engines in which indexed, (d) organic ranking information for various key words for each search engine, (e) pay per click budget per month broken down by each key word for each search engine, (f) number of one-way links, if any (g) number
of unique visitors each day, (h) number of page views each day, (i) any
online review sites (if so, provide links) and (j) hosting information.QBSNet, can assist you in documanting and packaging your business for sale in an organized and presentable manner.
For more assistance in business transactions, visit Quantum™ Blog.
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