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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 determined
by what someone can afford to pay for it. Typically this price will be 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 make 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. Every business has goodwill unless
it is closed down or failing badly. The amount to pay for goodwill
depends on the cash flow of the business and its general attractiveness.
If buyers did not pay for goodwill, sellers might as well sell
off their equipment and close down rather than sell as an on-going
business.
What is Discretionary Earnings?
Discretionary earnings are usually defined
as profit before income tax, depreciation, interest and owner's
compensation and other owner benefits. This 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.
Contact
us for more information.
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