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Selling your business requires
almost as much time and effort as buying a business. To get the
best price, you need to do a lot of homework.
Dear
Small Biz Adviser:
I am looking for guidance in selling a hair salon (mom-and-pop
in a great location). I'm selling the business only -- no real estate.
Could you recommend some books? How do I determine price,
lease, non-compete clause, owner financing?
Thanks
Seller
Dear Seller:
You represent the first inquiry desiring to sell a business, and
it brings the opportunity to review this procedure, along with support
methods, by which to briefly consider some of the basic elements
to be addressed.
To begin, let's consider what you will likely
be requested to submit to most legitimate buyers, and to all investors
or bankers who would finance the purchase:
- The last three years of IRS returns for the
business.
- The certified financial statements for the
business over the last three years.
- The certified financial statements of the
business as of this moment.
- A copy of any documents representing any
outstanding loans and other notes payable by the company.
- A list of all fixed assets to be included
in the sale, including purchase amount, purchase date, depreciation
records and any improvements made to any of those fixed assets
which may have increased the book and/or salvage value since the
item was purchased.
- List of accounts payable and receivable.
- Average days payable and receivable.
- Inventory of any items sold at retail and
inventory turnover rate.
You may add to or delete from this list depending
on what is to be sold and what an investor or banker may ask of
you.
Valuing the salon allows me to also answer your
question about books. This process involves evaluating several elements
in two general formats: price/building and ROI, or return on investment,
the two terms used by the Entrepreneur
Magazine Small Business Adviser book. The price/building approach
implements the basic approach of determining present market value
of the following:
- Real estate (which you do not have to offer
for sale).
- Leasehold improvements you made to the facility
at present market rates of construction cost.
- Any equipment and fixtures.
- Inventory and supplies.
Remember, your ability to value the equipment
and fixtures depends on the detail of depreciation bookkeeping you
maintained over the years. You may need to secure the input of a
building contractor for the present market value of the leasehold
improvements.
The return on investment process is not as easy
to determine. You begin with your financial statements. What is
the net worth of the company on your most recent balance sheet?
Remember that financial statements are structured to reduce tax
liabilities.
For example, your fixed assets may be valued,
due to depreciation, at a level lower than their present market
value. That would be more evident if you use accelerated depreciation
formulas. What is the annual net profit on your income statements
over the years? Could it have been more? For example, and let's
be honest, how many times have you incurred expenses that could
have been less? For example, making personal long distance phone
calls on the company phone can be easily overlooked and forgotten
when entering expenses in your ledgers. How often could you have
bought company supplies, and an item or two was not actually used
at the salon?
My strong suggestion is to purchase the Small
Business Adviser Book. You can buy a used copy online for under
$25, an investment well worth the money. It does an excellent job
of describing these and other matters of buying and selling a business.
Finally, do remember the buyer will always be
looking to lower your selling price. The level of homework you do
on valuing the company the better prepared you will be to document
the legitimacy of the selling price.
I wish you well.
Bankrate.com writers base their answers on our
editorial content and advice of financial professionals. We make
no claims or representations about the accuracy, timeliness or completeness
of such content, advice or the answers provided to you. Our content,
advice and answers are intended only to assist you with your financial
decisions. However, by its nature such information is broad in scope.
Your financial situation is unique, and our content, advice and
answers may not be appropriate for your situation. Accordingly,
we recommend that you get different opinions and seek the advice
of your accountant and other financial advisers before making any
final decisions or implementing any financial or investment strategy.
-- Updated: Nov. 10, 2004
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