Buying A Business- Continued
Governing authorities' approval: In most cases, the purchase of an existing operation survives "grandfather" clauses and new requirements for parking, zoning, traffic and health codes.
Leases: Many leases in place are below current market rates and offer considerable operating savings for the new operator.
Time: A start-up operation often requires four to 12 months of planning, obtaining necessary permits, construction, inspections, and approvals. The time and dollar expense is greatly reduced when purchasing an existing business operation.
Cash Flow: The cash register rings much faster when you buy an existing business and the customer base is often retained, again reducing your operating costs.
How to Actually Buy a Business?
This is based on how it happens in California, although it is fairly similar all over the country. You can discuss the specifics with a business broker in your area to find out any additional things you may need to know.
Initial Phone Call
You (The Buyer) make an initial phone call to a business broker in your area inquiring about purchasing a suitable business and describing your criteria for purchase.
Background Information
You (The Buyer) will provide your broker with your personal background information including your financial history. The broker will in turn usually provide you with information on various opportunities for sale that most closely meet your criteria.
Showing
Your business broker will set up an appointment for you to tour the business and talk to the owner. Your business broker will be present at all meetings. At this time you may ask the seller specific questions about the business. This appointment is generally scheduled during non-business hours so as not to interrupt or alert the employees or customers.
Valuation
There are two basic methods for valuing a business which are as follows:
1) Assets In Place Method - This method means that only the lease, leasehold improvements and fixtures and equipment are being sold. The name, menu, concept and goodwill are not included as part of the sale. With this method little or no emphasis is put on the financials of the business and the major factors in determining the value are the value of the lease, leasehold improvements and the fixtures and equipment. There is no standard formula in determining value using this method and valuation is somewhat subjective based on the brokers knowledge of the marketplace and comparable sales sold using this method.
2) Going Concern Method - This method means that the lease, leasehold improvements, fixtures and equipment, name, concept and goodwill are all included as part of the sale. The primary valuation method used for a going concern valuation is the yearly adjusted cash flow method. This means that the net profit on the tax return or on the year-to-date income and expense statement is adjusted by adding back the following items to the net income: one working owners salary and payroll taxes, any personal expenses the owner is charging the business ( life, health and disability insurance premiums, auto expense, entertainment and vacation expense, etc.), depreciation, interest and amortization expense on any loans the buyer will not be assuming, net operating loss carry forward charges and any other expenses which are personal and will not be applicable to the buyer.
Once the yearly adjusted cash flow is determined a multiple ranging from 1 1/2 to 3 is used to determine the value of the business. The multiple to be used is determined by several factors which include lease value (whether the lease is at market, below market or above market), the potential upside of the business (i.e. the current operation serves dinner only and has only a beer and wine license and there is potential for a strong lunch business and liquor sales), the quality and quantity of the leasehold improvements and fixtures and equipment, whether the operation is a franchise and whether the operation is a full service or self-service operation. For example, if the yearly adjusted cash flow of the business is $75,000 and the multiple to be used is 2 1/2, the value of the business would be as follows: $75,000 multiplied by 2 1/2 which equals $187,500 sales price.
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