What’s That Business Worth? 5

When valuing a business for sale, start by reviewing basic financial statements.

Example: A husband and wife have been working in his father’s small business for almost four years now. They would like to buy his small business from him. It is a independent copier/fax dealership located in a small town.

They know the market potential and that his accountant has taken advantage of all of the possible loop-holes to shelter him from taxes. This will be the first year that the financials will depict a (pretty close) picture of the company. How do they evaluate the company and gain a fair evaluation of what they should offer him for his company?

Two major financial statements should be reviewed with their accountant, the balance sheet and the statement of income and expense.

The Balance Sheet should show how the assets, liabilities and net worth of the business are valued. Items shown on the Balance Sheet may not tell the entire story. For example, is the equipment valued realistically? The equipment may be obsolete despite what is shown on the statement. Are the accounts receivable fully collectable? Also, the liabilities may not reflect contingent liabilities, such as a pending lawsuit or potential tax liabilities. These are just a few of the many questions you must ask to determine true value of a business.

Looking at the next important financial statement is the Statement of Income and Expense (also called the Profit and Loss Statement). Are the sales correctly reflected? Unfortunately, many businesses dealing with cash do not deposit all the sales receipts. If so, how can the seller prove the correct sales. Or, when anticipating selling the business, the sales may be overstated. The expenses may contain personal items that are not business related. The point I am trying to make is that you need an experienced CPA or business appraiser who represents your interests to represent you when buying a business.

In this example we may be dealing with a father who is trying to help his kids as fairly as he can. He may be willing to agree to terms that will not be a strain on their finances. We may also assume, that in retirement, he would like to have an ongoing income stream from the business. Since the business shows good prospects for the future I can envision structuring a deal that is beneficial to both of them. The idea is for the buyers to give as small a down payment as possible to afford them maximum working capital.

A percentage of the gross sales or net profits can be paid out to the father for a certain numbers of years. Using such a formula will enable him to benefit by any future growth in the business. To arrive at a total payout amount would, of course, require knowing a lot more information than is provided in this quick example.

About the Author Milton Zlotnick was the founding and managing partner of a midsized CPA firm in NYC before joining Plan4Biz.com, LLC. He served for a number of years on the New York State Society of CPAs' Financial Planning Committee. He is currently a Community Leader and Host for AOL's Business Know How division, providing advice on business… Read more »

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  • valentine Francis

    I love to buy a business, gas station and, the question is the money involve the owner gave a higher price and no one was interested even now it came down to almost half the price tag, It is a small gas station, no spar shop, only 4 diesel, 4 petrol, 1 kerosine and some bottles of engine oil .
    Now how do i make the business plan. The business has been closed since down almost 1o months now.
    I planned for lease he said no, but want to sell it outrightly. I need your advice on it. Thanks

  • Risto Nacevski

    I want to sale bussines – production of Low Alcoholic Drinks 5%Alc. Clomplitely with the BRAND, production line and total Know-How.
    How we can introduce this offer to US market.?
    please contact us on : 0038970354654 or 0038970221448

  • Visal

    Hi Risto Nacevski,
    You want to sale your business, Production of Low Alcoholic Drink. Can you tell me where is your business located? is it in the US, what state? I’m looking to buy a business, it can be Liquor store, C-store… contact me at nhungsang@yahoo.com

    I’m been reading a lot of info on this website, and I learn a lot from it. I’m so happy. Thank the website owner so much.

  • http://www.buyinga-business.com Christine Sutherland

    I’d like to offer some other perspectives on this case study. Firstly I’m assuming that the couple who wish to buy have worked as employees and been paid as employees during the 4 years they have worked with the business. They have therefore been fully remunerated, and they are not owed any discount on the business, nor any special favours over other potential buyers.

    Secondly the father has invested money and energy, and borne risk, over the life of the business. Normal capital gains are part of the return on that investment.

    Thirdly there is no guarantee that the business will survive, let alone continue to be successful. Any agreement which pays for the purchase with future profits would place dangerous exposure on the retiree who has living expenses and unknown medical costs to come.

    Fourthly any relationship can sour and business/family relationships are notorious in that matter.

    The intending retiree should be advised to examine existing finances to assess adequacy for retirement needs, and if he wishes to be generous to his son and daughter-in-law, calculate a part-sale (based on fair market price) and part-bequeathal. This recognises the value that is due to the business owner, without placing undue burden on either party due to an unknown future.

  • Russ Shenberger

    My wife and I are wanting to buy a running store in clarksville Tn. The business has been there for 5 years and the person who owns it now has been the owner for 3years and it has grown 100,000$ or a little less for the last 3 years. It is an established business with good clientel. They are selling the business due to her husbends job relocation, it is the only running sore in the area. There is room to sell more stuff in the store and it comes with it. Is this a good idea?