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 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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November 1st, 2007 quantum
One of the many facets of Client Interview includes information about effective ways for achieving success with the new business purchase. Business brokers make the business buyers aware of certain key-factors which when incorporated in the general strategy of the buyer to run a business, guarantee profitable results.
In a Client Interview apart from gaining pertinent information about the buyer’s background, experience, management skills or financial status, comprehensive and extensive knowledge about making the prospective deal in a successful business purchase opportunity is also imparted. Whether it is determining acquisitions or objectives of a buyer or making them know about the required documentation, business brokers determine the business opportunities that are best suited for the client’s skills and professional abilities. By explaining buyers the procedure of extracting maximum profit from the new business purchase, brokers help the buyers in gaining some relevant foresight into successful ownership of the business in future. This is done so as to prepare the buyer for smooth running of the business, he or she acquires or purchases in due course of time.
Following are some of the tips that help in attaining success for your new business purchase:
* Become intimate with the product(s) or service(s) of your new business and sell the benefits they deliver. Study the competition
* Manage the business in an honest manner
* Always remain committed to whatever you promise
* Apprise your customers or clients of negative news immediately and provide an effective solution
* Follow up on every detail in order to earn the client’s or customer’s ongoing respect.
Inclusion of the above mentioned points in your business running strategy, helps you become a successful business owner of a profitable business.
QBSNet, helps you find a business opportunity best suited for your interests and skills. Visit our website and know more about our business brokerage services.
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