What is a fair price for a business?
Like any other product, a business is worth whatever a willing buyer will pay
a seller in a free market. However, the value of most businesses is usually
related to cash flow and varies with the financing terms agreed upon. Price
will also depend on the type of business, the value of the assets, general
attractiveness of the business, and future potential, among other factors.
Typically the price will be approximately 2 to 3 times the annual cash flow
of the business after recasting, with a 25 to 50 percent down payment and
a note paid off over 5 to 10 years. If the business can earn the income you
want and service the note payments, then it is worth the price.
What is Goodwill?
Goodwill is the difference between the total value of a business and the value
of inventory, equipment and other "hard" assets. The amount to
pay for goodwill depends on the cash flow of the business and its general
attractiveness.
What is Discretionary Earnings?
Discretionary earnings are usually defined as profit before income tax, depreciation,
interest and owner's compensation and other owner benefits. Discretionary
Earnings is the amount of money the owner has available to pay himself, to
invest in additional equipment, to make the note payments on the business
and pay taxes.
Are there tax benefits in buying a business?
Usually you can take a tax deduction for depreciation on the fair market value
of all furniture, fixtures, and equipment at a much faster rate than real
estate. The Covenant Not To Compete and the value of training are tax deductible,
frequently at high levels. Finally, most businesses have deductible expenses
that add to the owner's cash flow. Always discuss tax issues with a qualified
tax professional.
Why not just start my own business?
Government surveys show that over 80% of new businesses fail in the first 3
years, for reasons such as poor location, low product quality, under capitalization,
and lack of management skills. This risk can be eliminated by purchasing
a quality business with a proven cash flow.
Why use a Professional Intermediary to help purchase a business?
Presenting opportunities for your review allows you to consider situations
that you would have an interest and match your own personal acquisition criteria.
Using an Intermediary also allows for confidentiality during the initial
stages of the buying process. Allowing a professional to lead you through
the steps to buying a business will ultimately give you the peace of mind
that your interests were protected and your investment well directed. Choosing
an individual who is professionally trained, has made a full-time commitment
to their career, has access to the largest data base on comparable business
sales in the world and can be trusted to work for your best interest means
you have chosen a VR Business Intermediary to work with you.
