How much is the business worth?
Welcome to lesson # 4 Who Wants To Be The Boss? I’m excited to have you as a valued member of our 6-month training program and am looking forward to seeing your own “business” “come to life” over the next few weeks and months.
Before we begin with this lesson, there are three important things that I need to mention to you…
1) Time Released Bonuses Every Throughout of The Program. You’ll automatically receive a FREE bonus as an active Who Wants To Be The Boss? subscriber. This will appear in your inbox approximately every 90 days or sooner and will include accessories and training materials to further streamline your time for you. Additionally, there are some built-in “surprises” (coaching, etc.) along the way at unspecified intervals. And, finally, there is a “graduation” bonus at the completion of your 6 month training that is literally worth more than the entire year’s subscription dues … so look for that on graduation day.
2) What’s In Store The First Few Months. I want to give you just a quick look at what we’ll be covering during the first few lessons in your training…
The first month will be the basic steps involved in getting things up and running (don’t fret veterans, I’ve got some “gold nuggets” in these preliminary lessons for you!) and the next month will be advanced strategies for expanding and improving the foundation of your new business.
3) Why You Should Never Cancel. There are many reasons why you should stick with your membership (it’s great training, if you keep quitting one thing and going to another you’ll never get anywhere, even if you don’t use it all now you can archive it to use later, etc.) (I also suggest you get a 3 ring binder and print and save each lesson) but there is an all-important reason that I have to warn you about from the beginning. Each of your lessons is sequential and delivered by autoresponder. That means, if you decide to cancel and rejoin at some point in the future, you’ll have to start all over again with the very
Note: Remember, I teach you “How to start or buy a business with no money down” “Lock up your check book, you won’t need it.”
How much is the business worth?
A business is worth only whatever someone is willing to pay for it at a given point in time
Now that you have found a business that you are interested in and you have gathered all the information, profit and loss statements (P&L’s), I RS returns, balance sheets for three years, a business profile and an asset list, with value, to be included in the purchase, you are now ready to start evaluating the Seller’s business.
This is the most important step in determining whether you buy this business. If the Seller’s broker or an outside source has created a valuation report, fine. Get a copy but don’t put a lot of credence in it. Just use it as a guide line. Also you have to remember, the Seller’s accountant has been trying to save the Seller from paying taxes, so he has been depreciating the business.
What shows on the bottom line for tax purposes, in most cases, is not the true earnings of the company, nor does the balance sheet show true market value of the company’s assets. I know what you’re saying. This sounds complicated and I need help! If it will make you feel more comfortable, go to your accountant and sit with him and do the recasting.
Once you have completed the reconstruction of the financials, you should have a better understanding of the company’s true earning capacity, or the lack of it. This will help you understand where the company is headed in the future. This is important to you as a Buyer, because the Seller will be trying to sell you future earnings or potential.
I never pay for potential! Potential, according to Webster; existing in possibility, capable of becoming, dormant, or something that hasn’t happened yet. Why should you pay for something that hasn’t happened and you have to work and invest your money to make it happen?
Please don’t let anyone tell you; “You are buying a future income stream”. This is broker talk. You will be basing your evaluation on current cash flow and assets only.
The following documents are critical for you to create your evaluation:
• Profit and loss statements for three years, created by an accountant, not seller computer created. Balance sheets for three years.
• Federal Tax Returns (I RS) three years.
• Interim Financials and balance sheets for the most recent reporting period.
• Complete list of equipment, furniture and fixtures (market value)
• Resent evaluation reports.
• Appraisals on business assets.
• Marketing and business plans… financial projections.
The old saying goes; “A business is worth whatever someone is willing to pay for it at a given point in time”. There is no foolproof way to evaluate a business. I will give you some formulas later in the lesson that I use to evaluate a small business. They seem to come out with the same numbers as the expensive 50 page evaluations!
Here are a few more questions you should ask yourself. What is the potential return on my investment compared to other businesses I can buy? A return on investment can vary from 10% to 35% depending on the amount of risk; the riskier businesses would be at the higher percentage. What is the future of this business in the market areas?
How reliable is the information that the Seller has given me? Don’t be as interested in the hard assets; be more interested in the Sellers goodwill, loyal customer base and intangible assets. You can buy equipment anywhere. What you want from the Seller is a loyal customer base and a good reputation. This creates the income stream. The assets are just the tools of the trade that enable earning streams to be realized. In my opinion, without the earning stream, the business has very little value. Why do people buy businesses? Hopefully to make money, to be the boss of their own destiny. Why do we have to reconstruct the financial statements of the seller? His financial statements do not reflect the true cash flow.
Most businesses are managed in a manner to reduce income tax to the owner, not to see how much taxes they can pay. If my accountant didn’t suggest legal write offs, I would find another accountant to work with. You do not have to explain to the Seller why you are reconstructing the financials. Some Sellers will have already done this, that’s okay, but you still want to do your own reconstruction.
Remember, I know I have mentioned this before, but this is a very critical process to decide the worth of the business you are proposing to purchase. If you don’t feel comfortable, get some help. If the Seller reconstructs the financials, watch out for overstated add backs or those items that can’t be verified. You only use the numbers that can be verified from the financial information.
Sometimes, in an all cash business, the owner will not report all of his income. I tell them, too bad! You either have to pay the piper up front or pay him at the end, either way you pay. I do not listen to Sellers who want to add value to their business from unreported income. I figure if he will lie to Uncle Sam, he’ll lie to me. This should be a red flag. This profit and loss reconstruction is the major factor in determining the true worth of the business. You need to discuss each cash flow item with the Seller. You can do this in person or on the telephone. Don’t make a big deal out of this, but do get the information.
If the Seller asks why you need this information, tell him the truth. You are reconstructing his financial statements to show a true market value of his business. Many Sellers are hesitant to discuss some of the perks they have been taking. They probably have expense items that were totally for personal use. These are the items you are trying to locate. You need to make the Seller
feel comfortable in discussing these expense items. This process will help you determine the available dollars for you to service the debt, pay yourself or a manager, and give you a reasonable return on investment.
Now that you have gathered all the necessary financial information about the company you are interested in acquiring, it’s time to reconstruct the financial statements.
This Week’s Assignment
Study Financial Statements. Find a few financial statements, profit & loss and balance sheets. Go to your library or go online, you’ll find samples you can start familiarizing yourself with this process. It is very important for you to at least understand these statements. Your accountant will be of help once you get going.
Okay, that’s it for today. Looking forward to helping you next time.
Hold on tight to your dreams
Coming Up Next…
Lesson #12: “Steps in Completing the Reconstruction of Profit and Loss Statements:” This information comes from the financial statements and or the IRS returns. Do not except less. I like to get both. This is a fun lesson, you really start learning how to evaluate a business for sale.