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Question: Should a business’s hard asset value be considered as part of an offer price to buy that business?

Answer: Too often people just estimate or do not consider the value of a company’s hard assets. Worst of all most use “Book Value” as stated on the Balance Sheet. Most Accountants and even the Internal Revenue Service agree that Balance Sheet values for machinery and equipment, in most cases, are not even close to “Fair Market Value”. These values are based on Depreciation Schedules that are allowed by the tax codes and usually have very little resemblance to the actual useful life of the equipment. In other words, the values are tax driven and not fair market. Often many assets are not even considered to have value because they have been fully depreciated. However, these assets are still in use and performing the task they were assigned to do, thus they still have value. When valuing a company, all fixed assets should be adjusted to fair market to show accurate values for both tangible and intangible assets. This answer was submitted by: George Abraham, Founder of Business Evaluation Systems.

Question: While researching businesses for sale, I have seen “cash flow” used in many different lights; please better direct this term pertaining to business sales.

Answer: The term “cash flow” refers to a variety of concepts, but its most common meaning in financial literature is the same as “funds derived from operations.” The concept of cash flow can be used effectively as one of the major factors in judging the ability to meet debt retirements, to maintain regular profits, to finance replacement and expansion costs, etc. Cash flow helps analysts judge whether debt commitments can be met without refinancing. For the purpose of business sales, cash flow typically means the dollar amount obtained by adding the net income of a business to the owner’s salary (if any) and/or fringe benefits plus depreciation, interest expense, and amortization, plus any one-time non-recurring expense(s). This answer was submitted by Sharon

Question: Do 'rules of thumb' have any validity when it come to buying a business?

Answer: Actually, yes! Probably the most important one is that the business has to be affordable. Which simply means that you're buying a business to make a living, and, to get a return on your investment. So if you put, say 40% down on the business, then there should be enough cash flow to pay you for your labor and then to make the debt service payments. Interestingly enough, if you pay the note off in 5 years you'll be getting about a 25% return on your investment in the business. Not bad, eh? Submitted by Jay Houghton

Question: What is Business Brokerage?

Answer: It is when someone acts as an intermediary between a buyer and seller of a business - similar to a real estate agent who sells homes, business brokers specialize in selling businesses. Submitted by Nick Gugliuzza

Question: How large is the market?

Answer: It is estimated that 18% of businesses changehands each year in the U.S., and there are approximately $360 billion worth of businesses sold each year. That's a lot of inventory on a business brokers shelf. Submitted by Nick Gugliuzza

Question: Why are businesses sold?

Answer: Contrary to what many people relieve, businesses aren't sold just because they are bankrupt. There are very legitimate reasons why a business owner might want to sell. Some of these are: Worrisome exposure to business risks often aggravated by personal guarantee loans. Tired of, or bored with the business. Possible failure of the business if one or more owners become seriously ill or disabled. Personal preference of the owners to retire or simply change their lifestyle. Divorce or dissolution of partnership. Owner's desire to pursue other business interests which may be more challenging or less stressful. Lack of sufficient working capital. A need within the company for new skills, new resources, or a new philosophy to cope with ever changing economic forces, government regulations and competition. World wide, businesses change hands every 5 years on average. Submitted by Nick Gugliuzza

Question: What is a Franchise?

Answer: It is a strategy that allows for the penetration and domination of markets, that permits the owner of a trademark to reproduce the elaboration of goods and / or services that he has developed successfully, through the implementation of administrative and operative procedures, so that a third party that invests work and capital, can reproduce them in other markets with the same quality. The main consideration so that a Franchisor requires the transfer of his know-how, is that he doesn't have enough capital to expand his business/trademark to other markets, and therefore requires of a third party (Franchisee) in order to achieve this. Submitted by Nick Gugliuzza

Question: What is a Franchisor?

Answer: It is an individual or company that possesses a certain trademark and marketing technology (know-how) of a product or service, who contractually cedes the rights and transfers the use of these, as well as committing himself to provide support and assistance in the organizational, managerial, administrative and marketing areas to the business of the franchisees. Submitted by Nick Gugliuzza

Question: What is a Franchisee?

Answer: It is an individual or company that contractually acquires the right to market a product or service within an exclusive market, utilizing the benefits that he gets by using a certain trademark, and the support he receives in the training and management of the business Submitted by Nick Gugliuzza

Question: What are some advantages for the Franchisee?

Answer: Reduction in the risk and uncertainty factors by investing in a proven business format. Permanent innovation in the methodological and technological aspects of the business. Continuous support on the part of the Franchisor. Documented training based on the Operative Manuals. Access to administrative control systems and evaluation of the performance of his point of sale. Training in the productive processes of products and services. Sense of belonging to a consolidated network of franchises. Access to promotion and advertising programs. Increase in his personal prestige by getting involved in a successful business concept Submitted by Nick Gugliuzza

Question: Should I buy a franchise or an independent business? Why are franchises so popular?

Answer: The answer is both yes and no. Franchises do have the advantage of broader awareness and centralized processes such as marketing, procurement, and training, and, they usually have a proven concept. However, that's not always enough to succeed in any given market. There's usually a lot of competition in those segments and your income is going to be limited by the size of your franchise territory. However, a strong franchise is often a great choice for a first time business buyer since you're going with a proven concept with lots of back end support, which is why they're so popular. Submitted by Jay Houghton

Question: I've been looking and looking for a business but never seem to find one that I'm comfortable with. Am I not cut out to be a business owner?

Answer: You're facing the same emotional challenge everyone faces when they do something new. Only this time the consequences of failure are much much greater. You may be looking too broadly. Instead you should look for a business that is within your area of expertise. When you do, your response will be "I can do that!", and then you may have found what you're looking for. Submitted by Jay Houghton

Question: I'm making about $65,000 a year in my corporate job, how much money do I need to make as a business owner so that my lifestyle won't take a hit?

Answer: Well, one of my favorite Sellers once said, "It's not what you make, it's what you don't pay for!" What he meant was that there are a lot of benefits to business ownership in terms of what you can legitimately take as a write off. Depreciation is an important one, but so are little things like cellular phone expenses, gas & oil for your car, business related travel, etc. All of those are expenses deducted from the business that you take, before you pay income tax. So as a business owner, you'll find that you don't have to make nearly as much as you do as a corporate employee to still enjoy the same lifestyle. Submitted by Jay Houghton

Question: Do I really need an attorney and an accountant to buy a business?

Answer: Buying or selling a business can be a complicated venture. While some businesses are sold without the help of accountants and attorneys I strongly recommend that both the buyer and seller engage professionals. Submitted by Andrew Cagnetta

Question: What will the process of buying a business cost me?

Answer: Business Brokers are generally paid by the seller not the buyer. However, other costs do come into play. Legal and accounting fees are generally required and additional startup costs may also come into play. Submitted by Andrew Cagnetta

Question: Will the current owners train me to run the business?

Answer: Depending on the complexities of the business the former owner will offer varying levels of training. On most small businesses the owner will offer training for two to four weeks at no cost to the new owner. Submitted by Andrew Cagnetta

Question: How do I know that the profit figures that the sellers claim are true?

Answer: As part of the acquisition process you will have to go through “due diligence.” During this period the seller is required to present documents to verify his profit numbers. Submitted by Andrew Cagnetta

Question: Will I have to come up with the entire purchase price?

Answer: No, while 100% of the purchase price is sometimes required, sellers will frequently provide owner financing to some extent. Additionally a bank may be able to loan up to 80% of the purchase price through a loan sponsored by the Small Business Administration. Submitted by Andrew Cagnetta

Question: How much money will it take to buy a small business?

Answer: Businesses vary in price a great deal however it would be unlikely that one could buy a business with much less of a down payment than $50,000. Submitted by Andrew Cagnetta

Question: Where can I find business transaction data to help place a value on a particular company I am interested in buying?

Answer: The Pratt's Stats® database, which is created by Business Valuation Resources, compiles and reports information on up to 81 data points highlighting the financial and transactional details of the sales of privately held companies in over 700 industries. Primarily, the data found in Pratt's Stats® is used to determine a business' fair market value or to perform financial research on the pricing of similar companies. Additionally, Pratt's Stats® data is used in price discovery by entrepreneurs, investors, advisors and business owners who are considering a business purchase or sale. A significant benefit of the data found in Pratt's Stats® is its ability to remove marketplace uncertainty and provide the user with detailed, meaningful financial and transactional information about "real world" business sales. Submitted by Paul Heidt Business Valuation Resources, LLC

Question: Where does Pratt's Stats® get its data and how is the data verified?

Answer: Pratt's Stats® obtains transactions for the database via three tracks. (1) Business Intermediaries who have been involved in business transfers contribute details on their closed private business transactions to Pratt's Stats®. (2) Business Valuation Resources' personnel travel to offices of business intermediaries to collect details on private business transactions from the intermediaries' files. (3) Business Valuation Resources' personnel perform research at the Security and Exchange Commission's Web site and collect details on private company acquisitions by public companies. Submitted by Paul Heidt Business Valuation Resources, LLC

Question: What is the composition of businesses sold in Pratt's Stats®?

Answer: Pratt's Stats® covers both main street businesses and larger M&A transactions. 47% of the 10,000 deals in the Pratt's Stats® database are businesses that sold for $1,000,000 or less, while 53% of the deals in the database are businesses that sold for between $1,000,001 and $500,000,000. The median selling price in Pratt's Stats® is $1,400,000. Submitted by Paul Heidt Business Valuation Resources, LLC

Question: I'm considering the purchase of a distributor business I've seen and like. My only worry is that one of their customers generates about 40% of the business. How can I protect myself?

Answer: The seller has to guarantee that this client will remain on board for a least a year. That's why seller financing is key: if the customer disappears then you can have a clause to lower the balance of sale. As an example, let's say you pay 2 times Cash Flow. And this client represents $50,000/year in CF. If they stop buying within a year then you reduce the Balance Of Sale by 2 times the $50,000 or $100,000. Your other option is to include an earn out clause whereby you agree on a total price of the business, but "x" amount is not paid at closing and only is awarded to the seller after certain contingencies are met during an agreed upon time frame. For example, after the first year, if the clients is an active customer, the earn out amount is considered to be earned. Also, try to negotiate this earn out amount to be paid as part of the existing or new seller note. Submitted by Richard Parker founder of Diomo Corporation and author of How To Buy A Good Business At A Great Price© .

Question: I am really excited about the idea of buying a business but, I am so worried that I may not make the right choice. The truth is that I have no clue what I should buy or even how to begin decising if any business I've seen is for me. I'm really stuck and feel that this may stop me from realizing my lifelong career dream of being my own boss. Help!

Answer: If you're going to do one thing right during the buying process make certain that you buy the right business for YOU! For most people, this is the biggest concern when it comes to buying a business. After all, on YOU can determine what business is right for you! Don't be alarmed, most people have no clue. At the initial stages of the process, the amount of businesses for sale can be daunting; the choice enormous. If you find yourself unable to focus on a particular type of business or if you really have no clue what you want, but you do know that you want to buy a business then sometimes you have to work in reverse. Start out by noting all of the businesses that you don't want. If for example you're not interested in a restaurant, gas station or retail store, you can probably eliminate 50% of all listings. Next, note the level of capital that you have a available as your cash investment. Then, write down, in order of priority, what the business must have in place (i.e. less than x number of employees, in business for 3 years, no weekends, high margins, exclusive products and or territory, etc). Check off these conditions against every business you consider. Next, get a true grip on your skills. Don't pretend to be something that you're not. The rule here is that whatever it is that you do best (sales, marketing, operations, etc), must be the single most important driving factor of any business you consider purchasing. With business ownership, one of the main goals is for you to control your own destiny. Don't put yourself in a position where if one employee leaves, you're in big trouble. Your skills must be the fuel that drives the engine. The right business for you is one that will thrive from your strengths and not suffer from your weaknesses. Take a long, hard look at yourself. Picture yourself in the business. Of paramount importance is that you must perceive yourself as enjoying the business. If you can't, then there's just no way that you can be successful. The business that you choose has to be one that you'll be proud to own. Another key factor is to avoid falling in love with the product; rather, you must fall in love with the profit and the lifestyle that it can deliver to you. Many buyers begin to dream about all of the exciting things about the business and they become delusional about what can realistically be achieved. The product that the business sells, or the service that it offers, unless offensive in nature, is meaningless in the overall scheme. If the business does not produce the income you need, or provide you with a satisfactory return on your investment, then rest assured, you will learn to detest the product quickly. Likewise, a bland, boring product line can become very attractive if the business is growing and you're enjoying the work. During the search phase, it's easy to become discouraged by the vast amount of available businesses. Don't get overwhelmed. Approach this methodically. If necessary, rule out the ones that you know that you don't want. Search through listings paying attention to asking price versus profits. Understand that listings do not always portray the whole picture. Send inquiries to the listed contact. Arrange meetings with sellers. Prepare the questions you need to ask. You cannot by a business from a listing. Visit businesses. With each meeting you'll get closer to knowing what is and isn't right for you. Above all, get into the game. Once you own the right business, you'll never look back! Submitted by Richard Parker founder of Diomo Corporation and author of How To Buy A Good Business At A Great Price© .

Question: Is there a co-relationship between a business' asking price and how long it remains unsold?

Answer: One would think that the seller would lower the price of a business that has been has been on the market for a while. Quite often this is the case, especially when a good business broker or other intermediary is involved. They will constantly measure the market and advise the seller that price reductions may be necessary to increase activity. As long as the seller is truly motivated to sell, price reductions will occur because ultimately the market NOT the seller determines the price. However, if the seller isn't motivated, it doesn't matter whether they are selling themselves or through a broker, they will maintain their inflated price and probably never sell the business. This should not be confused with a business where the seller may be holding out for the right buyer. Also in specialty businesses where the buyer pool is not large the time to sale can be much longer. You should also consider why a particular business hasn't sold. Surely price can be an issue. But a good business, with a solid history, clean books/records, and good future prospects will move very fast in today's market. Of course there are always exceptions, but if a business has been on the market for many months with no activity, the best comparison is to fresh fish: the longer it hangs around, the smellier it gets. Submitted by Richard Parker founder of Diomo Corporation and author of How To Buy A Good Business At A Great Price© .

Question: I want to buy a restaurant but have never owned one before. What are the main things I should look out for or consider?

Answer: Perhaps the first thing you should consider is why you want to buy a restaurant altogether? As long as you are doing so because this type of business fits your strengths and experience, it's fine, but if it's a matter of "it's always been a dream" then think seriously because the failure rate is terribly high in these situations. Now that we have that out of the way, here are the main considerations: The Lease and Location Unless you're looking at buying a restaurant that is considered a longtime "classic", chances are that the location will drive the business. Naturally, good food/service/value are critical aspects to any good restaurant you would consider buying but having access to customers is always key. As such, you must investigate the lease to determine whether it is assignable, the number of years remaining (you want at least 10 years between the current lease and available options). Something very interesting has occurred in this business regarding leases and landlords. They (the landlords) have become very weary of assigning leases to new owners who do not possess any restaurant experience. Often times, they will simply refuse the assignment regardless of lease language, or will require personal guarantees, collateral, numerous months of prepayments, or keeping the prior owner on the lease as well. Usually, you can negotiate with any reasonable landlord, and don't take a hard nosed approach initially; however, investigating the lease and transferability thereof should be one of your first tasks in your due diligence phase. The Valuation - always a challenge Restaurants are notorious for having lots of unreported income. I'll leave the pros and cons aside for another column but the fact remains you'll likely see several restaurants where the books and records state one thing but the owner tells you a whole different story. It's one of those: "don't worry, there's plenty of cash sales". The onus is on the seller to prove the figures that he represents as the "real" profit. I receive a tremendous number of inquiries from clients and subscribers about this issue of unreported income and this is a very dangerous situation for any buyer. Personally, I have always felt if the seller cannot prove it, he cannot expect to be paid for it. Unfortunately, this is easier said than done and so you need their assistance in reconstructing the figures. As such, it is important that you engage a CPA who is familiar with these situations as well. Usually, the financials can be reconstructed by reviewing supplier invoices, payroll, seller records, meal receipts, etc. Think about it as a three pronged chair (as an associate of mine once told me). If you have two legs, you can usually figure out the third one. When it comes to unreported income, there are three questions that you must present to the seller: Can he prove it? How? Is he willing to? Of utmost importance is for you to convey your sincerity to the seller in finding the real figures but it is expected that he complies with the necessary data. If not, you must understand that you are taking a major risk by taking his word for it. Be diligent and be prepared to walk if the numbers simply do not prove out. The Equipment: You'll want to be certain that the equipment you will be receiving with the business is in working order. If not, what are the costs to repair and or replace it? In most cities you can find a local company/individual who will examine the equipment and provide you with a report. This can be very helpful. Naturally, they will want to cover themselves and also find a few problems. Nothing is perfect and a restaurant business will need to replace equipment on a regular basis and so as long as there is nothing major you will be fine. Experience and Transition: If you're someone who has always had a dream to own a restaurant then I won't be the one to squash your goals but you may want to consider the type of restaurant that you buy to be certain that it fits well with your strength. A good start is to understand what the current owner does on a daily basis since it is he that you will be replacing. If you do not have the same skill set in general terms, then someone has to be hired who does and how will this affect the profits? Conversely, there are many restaurants where the seller oversees the operation, works the cash, there may be a manager in place, and some where the owner is more host than operator. These all bode well if you do not have direct experience. That's not to discount the importance of prior experience. The key with a restaurant just as any other business is to determine without question what is it that drives the revenue and profits. That factor must be what you do best. Other Issues: Interestingly enough, the average restaurant purchase involves over 125 points that need to be investigated during the due diligence phase including the financials, equipment, health issues, the suppliers, employees, lease, and numerous other important issues. Submitted by Richard Parker founder of Diomo Corporation and author of How To Buy A Good Business At A Great Price© .

Question: In an independent motel business, how do you decide what should be the asking price of the hotel, and what should a buyer pays for it. Example: If the motel's asking price is 435000.00 and the annual revenue is 145000.00. With this income and asking price ration what should be the right price to ask? his motel in not located in a big city like Chicago. It is in a very small city with a population of 12 000 people. but the location is right offer the major highway exit.

Answer: When it comes to valuing motels, there are a wide range of options available to you that somewhat standard within the industry. These include multiples of the annual revenues, per room valuations, net income "cap rates" and multiples of what may be referred to as Owner's Benefit" or "Sellers Discretionary Cash Flow" or "Adjusted Net". Personally, I prefer a multiple of the Owner's Benefit figure because what you ultimately can put in your pocket, and have available to service debt and build the business is really what any business owner should be concerned with when valuing any business. After all, if the business is producing solid revenues but weak profits, who cares what the revenues are? Having said this, the various barometers are: § 2.5 - 3 times the annual revenues for motel/small hotels § $18,000 - $22,000 per room § 6 - 8 times Owner's Benefit The Owner Benefit Calculation is a combination of: Pre tax Profit + Owner Salary + Owner perks + Interest + Depreciation. Although I prefer to use this technique, be certain that you properly adjust the Owner's Benefit Figure to allow for any anticipated capital expenditures that are required now, or within the next few years. On a separate note, be certain that you visit with city hall to determine if there is any major roadwork planned for the highway or road which the motel borders. Usually, you can expect to have construction at least every 10 years so you'll want to check this out. Submitted by Richard Parker founder of Diomo Corporation and author of How To Buy A Good Business At A Great Price© .

Question: Some listings have a lot of relevant information and others seem to have almost nothing. How do I separate the good from the bad ones? What should I be looking for so I don't waste my time?

Answer: Insofar as the detail of the actual information or lack thereof, please understand that you cannot buy a business off a listing. Quite often the initial information you'll see online is akin to a classified ad. Further investigation is always warranted. A lack of information is not a reflection of the viability of the business nor does an abundance of information mean it's good. As a general rule, if the business is of interest to you send in an inquiry to learn more. In a detailed listing, there are over 70 things to look for but, in the initial listings, at the very least you'll want to examine the following: Business Description: First and foremost, make sure the business interests you. Look for key points that would make this business a solid candidate for growth (i.e. exclusive territory, large repeat client base, double digit revenue/profit increases, growing industry, etc). Confidentiality is the key for a seller so the description may be generic but it will provide enough information so you can determine the industry that the business is in specifically. Good businesses sell very fast in today's market so by identifying the precise category of the business (if it's specialized) will allow you to begin gathering industry and competitive information. Assemble some specific questions relative to that particular business to ask of the include seller/broker when you hear back from them. Asking Price: My favorite term; to me it's an invitation to negotiate. So don't worry about the price but of course be reasonable. You won't buy a million dollar business for ten bucks but there is room. Likewise, don't chase listings that you know are beyond your reach. The average small business sale over the past seven years has been within 14% of the asking price. Of course, there are other ways to creatively structure a deal where the actual price plays less of a role. It's all in the terms!! Seller's Discretionary Cash Flow: The terminology may vary from site to site but you need to determine more than just the business' profit. As the new owner, you need to know precisely what cash you will have available (assuming everything remains the same) to service the debt, generate a salary for you, and fund the business/ growth. As such, find out exactly what's included in the number being represented. Pay attention to "add backs" to be sure they are reasonable. Down Payment: The selling of businesses is most often a down payment driven transaction. The asking price is far more flexible. Every seller has an amount that they want "in their pocket" after closing which is the down payment amount. Again, this will prove to be far more rigid that the purchase price. Many listings will list the price only, or the price and the down payment as the same, but rest assured EVERYTHING is negotiable. A seller listing the willingness to finance, or if the business has pre-qualified for financing, is usually well worth investigating further. Skills Required: These may not always be shown initially. A seller will usually put the most simplistic, "idiot proof" and basic skills in this section because the more specialized the greater the buyer base. As an example, they almost always mark: "general business/sales/marketing/administrative" which doesn't mean much but if they list a specific skill pay attention! Reason for sale: Personally, I like all the morbid ones: death, divorce, etc. They usually mean a more motivated seller. However; relocation and retirement are also good indicators. I'm always leery about "other business interests" as a reason. I can never understand what someone's other interests can be if this is such a good business! But, you never know. Miscellaneous: Some listings will include financing terms, asset values, lease information. Others may not. Regardless, the seller/broker will have more information beyond what's been posted. Reply Information: You'll have an email address to reply to the ad and often a link to the broker/seller site. Remember confidentiality is important to the seller so your initial inquiry can ask a few basic question but the most important thing is to ask them to forward a non-disclosure agreement to you to sign. Then, you can begin to ask the real pertinent questions. Check it out as it will give you an idea of their professionalism plus they may have additional listings on their site which are usually more detailed Submitted by Richard Parker founder of Diomo Corporation and author of How To Buy A Good Business At A Great Price© .

Question: Many of the listings I come across do not include the business's revenue or cash flow. How can I possibly be interested in a business without at least having some sense of these numbers?

Answer: This is an excellent question. There's no doubt that it would be difficult to formulate any kind of meaningful impression or assessment of a business without certain key financial information - especially basic information like revenue or profitability. That being said, keep in mind that your agenda when looking at business for sale listings should be first and foremost to determine if the business model/type is of interest to you. Naturally the financial ratios are key; however, these can easily and quickly be disseminated to you by the seller/broker once you contact them and express interest. I have seen countless online business for sale listings and certainly the majority do include the key financial data (although still to be proven). In some cases though, especially in larger business, these details may be omitted initially due to confidentiality concerns. Here is my suggestion: when you come across a business listing that is of interest to you, even if there is some missing information, go ahead and contact the seller/broker. Before you get busy requesting detailed financials you should simply note that you're interested in the business, and you'd like to sign the necessary confidentiality agreements. Once those are in place, you can then delve into the financial information you will need to further evaluate the business. Submitted by Richard Parker founder of Diomo Corporation and author of How To Buy A Good Business At A Great Price© .

Question: Please explain absentee owner offers and what to believe. How often should the owner visit, how to manage, etc.

Answer: Absentee businesses may sound like an ideal situation; however, it is very rare to find a highly-profitable, well-run absentee business. There are no hard rules for how often the owner should visit or how to manage. Each situation is different. There are a few things that you must be aware of to have a successful absentee run business: you need above average, highly trustworthy employees. You'll want a manager who treats the business as their own. Consider having a profit sharing plan or even giving them a small amount of equity. Do whatever you can security-wise however; no matter how good the employees, or the manager, you'll probably have a higher than average theft rate. It's simple: if you're not there to police the business, it's going to happen. Having said all this, let me state that I am not a fan of absentee run businesses. In my experience, part time effort means part time results. If you're going to invest your hard-earned money in a business then you should learn it, run it, build it, and manage it. Once you have this down pat, then you can bring in others to take over slowly so you can spend time away from it. Submitted by Richard Parker founder of Diomo Corporation and author of How To Buy A Good Business At A Great Price© .