Purchasing A Small Business

.. ium for ‘goodwill’ if the earnings are high enough.(Horn, 51) Another area that must be calculated is goodwill. Goodwill is not an operating cost and cannot be depreciated. It does not provide you with tax relief(Smorenburg, 114) Since there is no record of the worth of goodwill, it can be fairly difficult to determine an accurate buying price. Usually the seller will set the price based on their knowledge of the company. The set price, however, should be reasonable. Negotiations can be made to produce an agreeable price.

The next step is to set a purchase price. There is no right or wrong way to value a business. Each company has different characteristics Obviously, the seller will argue that the net asset value method is right because that’s what he invested in the business.(Tuller, 103) You should consider all factors in the P/E/ ratios, liquidation value, net asset value, and historic and projected cash flow. After analyzing these aspects of the business, you should be able to determine a fair price for the entity. The letter of intent is a document that aims to formalize the terms around which a later negotiation will revolve. As such, the letter is primarily a tentative offer that remains subject to further negotiations and confirmation of material facts through a process of due diligenceBy offering a letter of intent, you tangibly solidify your resolve and thereby make the seller understand that you are a serious buyer.(Smorenburg, 126) The letter of intent covers the precise terms of the deal, the payment details, and management and other issues involving the transfer.

You need to give your accountant and lawyer a draft of the letter for review. This way, you are protected from any loopholes that can harm you. It proves that you are a serious buyer and entices the seller to more openly discuss sensitive aspects of the business. The letter is a written contract that can be legally cancelled at any time without the consent of the other party, so be sure that you and the seller are in agreement. Once everything is settled and you and the seller are in agreement to the term of the letter of intent, the next task you face is finding the initial capital.

Using other people’s money to finance a purchase is a key ingredient if business success. Financing falls into two separate categories: debt and equity. Debt financing is the most elementary of the two. It is basically taking a loan from a lender and paying it back with interest. It is reliant on the business or individual’s ability to pay the loan off.

Usually, collateral will be made available to the source of the loan in the case that you cannot continue to make payments. A good credit history and reputation is another aspect that financing is reliant upon. With these, a loan is much easier to get. Equity financing means obtaining funds in exchange for selling or giving up a part of interest in the business. Equity financing is not a loan; rather, it is the sale of a part of you business.(Fallek, 82) The popularity of equity financing has increased in the high tech industries in the past few years.

However, selling a part of your newly purchased business may not be your cup of tea, so choose your type of financing wisely. Some traditional sources of capital include yourself, family and friends, commercial banks, loan companies, insurance companies, credit unions and private investors. The old saying, don’t mix business with pleasure is applicable when dealing with family and friends. Taking a loan from these sources can cause turmoil if the loan cannot be paid back. Banks are the standard for business lending.

The amount they charge is based on two factors: the size and history of the customer and the risk the bank will take in providing the loan.(Fallek, 85) If you are able to decrease the bank’s risk and have a standing credit line, you will get the most out of your loan. The other types of traditional lenders are less frequently used, but are also good sources of capital. Nontraditional money sources are unlimited in number and type, but you need to be creative to acquire the necessary funds from them.(Fallek, 89) These sources include customers, suppliers, leasing companies, local development companies, and advertising for money. Customers or potential customers are often great sources of funding, as well as suppliers. Suppliers will furnish you with the necessary equipment and product.

Leasing companies and local development companies are also good nontraditional sources of capital. You can actively seek funding by running a display advertisement in the business section under the appropriate heading in the classified ads of your local newspaper. Specify the amount of money needed and the type of business for which it will be used.(Fallek, 91) Yet another source for funding might be through the Small Business Administration. They offer different types of loan programs to small businesses. The SBA Guaranteed Loan Program grants a loan on the basis that the individual needs more time than allotted by other lenders to pay back the loan, has insufficient credit, or lack business experience.

There are no restrictions as to the number of SBA loans a company or individual may have, as long as the SBA’s exposure does not exceed $750,000.(Fallek, 96) The final step in acquisition of a business is the closing. You will need a lawyer if you don’t currently have one. The search for the right lawyer requires certain questions to be answered. For instance, you want to find out the lawyer’s hourly rates, experience, availability, if there is any conflict of interest between the lawyer and the seller, and any other applicable questions. The best way to find a lawyer is word of mouth, ask friends and family for references. When a lawyer is located, you must then begin the audit review. Even thought most buyers work with their local CPA in preparing the business plan and counsel with him on tax matters relative to the acquisition, the audit review should be preformed by an independent CPA firm in the same city as the target company; preferably on of the ‘Big-5’ firms The audit review consists of a comprehensive look at business since the last audit with particular emphasis on determining the adequacy of internal controls and internal reports.(Tuller, 192) Be sure to take this step, it examines all aspects of the business and insures that it is a safe investment.

After this is complete, it’s time to close the deal. The documents generally needed for proper closure are: a buy/sell agreement, an earn out agreement, a promissory note terms and conditions agreement, title search and title insurance, lease agreements, employment contracts, personal guarantees, and an equity agreement with the lender. These documents are dealt with and an announcement should be made to the employees, customers, and vendors of the change in ownership. There is a mood of anticipation, of excitement, and even-if the truth be know-of fear. Of all the events which take place in the business world, nothing can match an acquisition closing for pure excitement and thrill.'(Tuller, 203) the actual signing of the transfer documents will not usually take more than an hour. The key is not to worry about what you are signing, that’s what your lawyer is for.

After all the money spent, the time devoted and the effort put forth, the business is finally yours. Running your own business can be very rewarding. You don’t have anyone to answer to besides the government. You are in complete control. Along with this the ability to write off certain expenses is enough of a reward in itself. The effort you put forth is completely up to you. The life and death of the business is in your hands.

Bibliography Bibliography 1. Fallek, Max (1994). Finding Money for Your Small Business Enterprise-Dearborn: USA 2. Fluery, Robert (1995). The Small Business Survival Guide Sourcebooks, Inc.: Naperville, IL 3. Horn, Thomas (1990). Business Valuation Manual Charter Oak Press: Lancaster PA 4.

Peterson, C.D. (1990). How To Leave Your Job and But A Business of Your Own SVS, Inc. (Video) 5. Smorenburg, Michael (1998) Business Buyer’s Kit Career Press: Franklin Lakes, NJ 6.

Tuller, Lawrence (1990) Buying In: A Complete Guide to Acquiring a Business or Professional Practice Liberty Hall Press: Blue Ridge Sumit, PA Business Reports.