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How to Calculate Goodwill when Valuing a Business

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Business sellers and buyers have different approaches to the valuation of goodwill. The seller will likely inflate goodwill due mainly to his or her emotional attachment to the business whereas the buyer is likely to deflate its value. Goodwill, being an intangible asset, is not easily identified or measured. It is what attracts customers to continually patronize a certain business. It helps a business to earn more profits in the future. It can be any or all of the following: customer lists and relationships, brand name and logo recognition, business connections, reputation, trademarks, patents, inventions, employees and their skills, and vendor relationships. All these intangible but very valuable assets contribute to a business’s worth.
Wikipedia defines Goodwill as “the value of an entity over and above the value of its assets”. If you have to put a monetary value on goodwill, it is the amount you pay in acquiring a business that is in excess of the fair market value of its net assets.
Goodwill = Purchase Price – Fair Market Value of Net Assets of the Business

Once the value of goodwill is established, this is listed as an asset (aside from the tangible assets) in the business’s balance sheet.
Below are some popular methods of goodwill valuation.

Goodwill Calculation: How to Calculate Goodwill

1. Net Asset Method
Add up the fair market value of all tangible assets of the business and subtract this from the purchase price to determine the value of goodwill.
Goodwill = Purchase Price – Fair Market Value of Net Assets of the Business

2. Average Profit Method
Calculate the average profit from previous years and multiply this figure with the number of purchase years. Purchase years is defined as the number of years required for a business to yield its purchase price.
Goodwill = Average Profit X Number of Purchase Years

3. Super Profit Method
You obtain Super Profit when the actual profit is more than the expected or normal profit of a business. In this method, you calculate the normal profit with the normal rate on investment. Then calculate Super Profit using the following formula:
Super Profit = Actual Profit – Normal Profit
Or Super Profit = Average Profit – Normal Profit
And Goodwill = Super Profit X Number of Purchase Years

4. Market Value Method
Study records of comparative business sales data in the area and industry similar to the business for sale to get the market value or cash basis purchase price of the business. Subtract the total value of all assets from this amount to calculate the value of goodwill.

Goodwill = Cash Basis Purchase Price – Total Assets Value

5. Capitalization of Average Profit Method or simply Capitalization Method
In this method, you calculate capitalized value of the business by using the following formula:
Capitalized Value of the Company = Average Profit or Normal Profit X 100/Normal Rate of Return

Net Assets = Total Assets – External Liabilities

Goodwill is the difference between the total capitalized value of the business and the net assets.
Goodwill = Capitalized Value – Net Assets
Think of the future income or potential earnings of the business when calculating goodwill. Value goodwill high is there is a high probability that the business will continue to profit in the future. On the other hand, goodwill is valued low if the projected future earnings are less than in previous years. Goodwill keeps bringing the customers to the business.

Call American Business Finders or seek a professional such as a Certified Public Accountant (CPA) to help you in business valuation and its tax implications. Which calculation method will you use to get the best valuation of business goodwill?


How to Value Inventory when Buying a Business

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Buying a business can be a complicated process. There are many areas that may cause the failure of purchase negotiations or cause animosity between the seller and buyer. One such area is the valuation of the business. Determining the worth of a business is a crucial and critical aspect of the buying process. If you buy a business that is overvalued, you are paying more than what the business is worth. On the contrary, if you buy a business that is undervalued, you will wonder if the business is failing.

Take the case of valuing the inventory of a business for sale. What should you include in the inventory? What valuation method should you use? In most industries, the value of inventory is above the asking price of the business for sale. Here are some pointers on How to Value Inventory:

1. The potential buyer and seller should agree on which valuation method to use for inventory. This could be by using a) the original purchase price or vendor’s invoice, or b) the current value of the items. The latter is the simpler and more realistic method. Using the original purchase price may not reflect the actual value of the assets.

2. The final count and valuation of the inventory should be done at the close of the sale, since the amount of inventory during the purchase process is usually different.

3. There should be an anticipated value for the inventory between the seller and buyer. This value will more or less reflect the closing value of the inventory, which will be adjusted accordingly. This is done to avoid disagreement between the two parties. This will also ensure that the buyer has some inventory sufficient for a few months’ worth of operations when he or she takes over the business.

4. If you are not sure which particular items can be valued as inventory, consult an accountant. Inventory includes products and materials that can be resold or used in servicing a client. Inventory is different from other hard assets such as machineries, equipment and furniture.

5. The buyer must insist on the physical count of the inventory. The business may have inventory control software but because of input errors, glitches or unaccounted losses, there may be some discrepancy with the actual inventory.

6. Determine the quality and condition of the items – which items are saleable and should be included in the valuation. You can negotiate items that are difficult to sell, such as those no longer in demand, should be valued for half the cost. Other items that if you feel are not in line with what you want to sell or not compatible with your target market could be excluded from the valuation.

7. If you and the seller have a friendly relationship, you can conduct the inventory count together, or at least a part of it. This will be time well spent for you as the seller can explain some aspects of the business during this time.

8. Bring in an outside inventory service firm that will count the items, determine the cost and calculate the value of the inventory. This is a wise move especially if there is some animosity between the buyer and seller, or if the seller and buyer do not want to take the time and energy to count the inventory themselves.

Valuing inventory is important. You or a qualified representative should be present during the examination of the inventory. Knowing the status of inventory and what is available will apprise you of its value. If you do not agree to the price tag set by the seller, negotiate. Does the inventory valuation make sense to you?


7 Negotiating Tips When Buying or Selling a Business

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A person buying or selling a business needs the temperament and correct negotiation skills to successfully close the deal. It used to be that people think you are a good negotiator if you push for what you want and you get it. This mentality is passé. Today, deals are made by parties willing to find solutions to their differences. The two parties at the negotiation table are not adversaries. They do not attack one other, but rather they address the issues at hand.
Here are some Business Negotiation Strategies:

1. Prepare in advance.
Prior to beginning negotiations, study the business and the market trends through trade / industry publications, trade events and networks, and consult with those in the same line of business. Knowing the industry statistics and analysis of the business arms you with information you might need to back up your offer or counter other proposals. You can demonstrate that you know what you are talking about and you cannot be misled.
2. Listen to the other party.
Give the other party your attention and the time to say what is on the their mind. You should refrain from making assumptions. You can gauge the other party’s reaction and emotion to key issues so you can later respond accordingly. The information you gather forms the basis for your questions later.

3. Kindness and diplomacy will go a long way.
Be genuinely kind and interested. As the saying goes, “It is easier to attract bees with honey than with vinegar.” Kindness is an advantage in business negotiations. You gain credibility as well as the trust and empathy of the other party when you are reasonable, straight forward, fair and polite.
4. Be flexible and open to options.
Have an open mind by not setting strict parameters from the start. Be open to options that may bridge seemingly wide disagreements or differences. Your attitude and willingness to be creative during the business negotiation can go a long way towards a successful transaction. Give away a concession but make sure you also get something in return.

5. Let the other party go first.
Avoid going first on the price if you can. Knowing the other person’s starting point before you give yours is an advantage. This enables you to adjust your aim. You can refuse to start negotiations if the price is unacceptable. If you do, the other party may be forced to at least re-think his or her offer before you start business negotiations.
6. Do not be a bully.
Being a demanding person with the attitude of a bully turns the other party off. Your know-it-all comments may be insulting or rude. It is okay to be tough in some aspects of the negotiation, but you have to choose your priorities. Be forthright when you present your bid. Proceed gently and amiably.

7. Keep notes of the transaction.
To reduce misunderstandings of what was discussed or agreed upon, a well-documented transaction record is in your best interest. Every major agreement or obligation of the parties should be recorded in clear language, signed or initialed, and dated for future reference.
The best chances for successful negotiations come when the two parties like one other. Be honest and truthful about your situation. There should be no room for ambiguities or evasiveness. Be patient, open and creative in finding solutions to any disagreement. It is a successful negotiation that gets the deal done. Are you ready to apply these business negotiation strategies?
**Information provided by GlobalBX


Pipeline 4th Edition

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welcome to american business finders
American Business Finders

We service Minneapolis, St. Paul, Duluth, Rochester, St. Cloud and all surrounding areas. We are Business Brokers specializing in helping business owners sell their business in a confidential manner to qualified buyers!

About American Business Finders

We are dedicated to providing professional and confidential services to business owners and business buyers. Read More…

Selling your businessSelling your business is a major decision! You have devoted your time, money, and energy Read More…

Buying a Business
It can take you twice as long and cost twice as much to start a business up from scratch. Buying someone else’s business provides excellent benefits including Read More…


Follow Us On Facebook and Twitter

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Please see below a few Featured Businesses for Sale through American Business Finders. We encourage all of our members to inquire and network these opportunities to investors, business people, friends or family. You can also contact us for more information by calling us at 1-855-545-SOLD (7653)

Businesses

  • $6,500,000…Prestigious Golf Course and Club House located in the Minneapolis-St. Paul Metro area with beautiful banquet facilities
    Beautifully landscaped course with lots to offer even the advanced golfer. Banquet facilities for all occasions with amazing views.
    Read More

  • $59,000…Growing Hardwood Flooring Restoration Company
    Great small hardwood flooring company with growth potential to move to the next level
    Read More

  • $95,000…Sporting Good Manufacture – Multiple Patents with Industry Leading Regional, National, and International Vendor Accounts
    Established and Well Known Throughout the Industry with Great Sales History for Over a Decade. Huge Potential for Growth and Innovation…Read More

  • $3,700,000…Northern Minnesota Waste Management Hauler with Trucks, Containers, Equipment and Landfill Available>

    Waste Management Hauling Company with Almost 60 Year in business. Very Profitable with 80 Acres Available…Read More

  • $2,500,000…Midwest Winery with Great Sales, Very Profitable and even larger growth potential
    With Over $2million in Assets and Budgeted 2011 Sales of $1.8million, approx 20 Acres This Winery Is a Great Success…Read More

Franchises

  • B2B Office Space and Custom Business Solutions
    Have the lifestyle you deserve with this Monday – Friday office solutions business and the income to fit your needs!
    Read More
  • Glass Restoration – New Franchise Opportunity in the Midwest with more than 50 locations
    Cutting-edge glass restoration. Ranked by Entrepreneur as #90 out of the top 100 Low-Cost Franchises and #34 out of the top 50 new Franchises in 2011….Read More
  • Highly Ranked International Industry Leading Health & Fitness facility Franchise
    Become the Owner of a World Class International Health & Fitness Franchise in the Midwest…Read More

  • Well Established Painting Franchise with National Exposure
    Extremely Rewarding Franchise with Great Support and National Exposure. No Paint Experience needed for the Business Minded…Read More

Other

  • $55,000…Top Sporting Goods Major Regional, National, and International Vendor Accounts
    Bring your outdoors company to the next level with the addition of these current major vendor Accounts…Read More

American Business Finders can help you buy or sell a business in Minnesota and throughout the Midwest. Please visit us at www.AmericanBusinessFinder.com or email us at info@americanbusinessfinders.com
To unsubscribe to this e-mail at any time, please reply with the word “unsubscribe” in the subject line

Licensed by Network Realty Inc
11995 Co Rd 11 Ste 220
Burnsville MN 55337 Office: (952) 583-3860 Toll Free: 855-545-SOLD



8 Tips on How to Value a Business

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American Business Finders – GlobalBX
Valuing a business is a challenging aspect when buying a business. How can you arrive at the right price for a business for sale? Will you, the buyer, just rely on the asking price of the seller? In most cases, the seller wants a price higher than the real price of the business because the former factors in the hard work and number of years he or she invested in the business. It is up to you to decide if the price accurately reflects what the business is worth. How will you arrive at a counter offer? Here are some tips in valuing a business.

1. You should learn how to read and understand income statements, balance sheets and other important financial records. From the data reflected in these documents, you can follow the financial status of the business through the years. These numbers can provide you with the basis in valuing the business. Is the business growing? Is it worth more now than last year or previous years?

2. You can use the Asset Valuation method of valuing a business if you are buying a retail or a manufacturing business. Calculate the fair market value of tangible assets such as equipment and inventory of the business, or the price to replace them. If possible, use the replacement costs of the assets in the same or similar condition. This method is usually used for companies losing money or with flat income.

3. On the other hand, you take into account the intangible assets for service businesses such as professional services, consulting, or non-asset intensive companies. Include in your consideration the number of years that the company has been in operation, the length of time the seller has owned the company, why the owner is selling the business, the location, profitability, level of competition, risk factors, growth potential, repeat customers, goodwill, etc.

4. You may also value the business based on the past historical data or performance of the company. This can more or less predict the future profitability of the business. But you also have to factor in the prevailing economic condition. The price of the business usually increases during a growth period and drops when there is slow growth or a recession.

5. You may also look at businesses for sale similar to what you are buying. Your business valuation will be more accurate if you can find a business similar or close to the specifics of the business that you want to buy.

6. You can use the Owner Benefit valuation or Income Approach if you are buying a business that has the ability to generate cash flow and profit. The formula is:

Owner Benefit or Discretionary Earnings X 0 – 3 = market value.

The Owner Benefit includes return of investment, living wage, debt service or interest expense, personal expenses, and depreciation of assets. This amount is the money you can get based on what the company has generated in the past.

7. Work with experts such as accountants, business brokers and appraisers. An accountant can help you study the numbers of the business – its assets, liabilities, earnings and losses among other things. Find a business broker or certified business appraiser who is experienced in valuing businesses similar to the one that you want to buy.

8. Consider applying various valuation formulas to test the value you came up with. Remember that valuation is a personal formula. You could use one or combine various valuation methods to arrive at an average figure of what the business is worth to you.

Determining the value of a business is a complex procedure. If you are new to this, it is best to seek the help of experts. There are also software packages available that you may resort to save time or money. The important thing is to gather all the numbers and information you need, and study them well.

You may get the business of your dreams but it may cost you years of headache if you do not arrive at an accurate valuation. Which valuation method is right for the business you want to buy?


Set Yourself Up For Success – Starting With a Successful Business

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In an economy that is questionable and a job market that is near record lows, what could be better than determining your own future? That is easy to say and fun to believe, but the real question is, “How do I make that happen with the best chance of success?” After all, isn’t it believed that 90% of all businesses fail after 10 years? A. Malachi Mixon III, a Professor of Entrepreneurial Studies at Case Western Reserve University shows us the real picture. In reality, 29% of businesses that started in 1992 were still in business 10 years later. Similar to today, shortly before 92 the US was facing economic unrest with high unemployment rates and a failing stock market.

To give yourself the best chance to be in that 29%, you must understand your strengths, motivations, financial capabilities, and most important, the options that are available to you in the market. According to dictionary.com, “An entrepreneur is a person who organizes and operates a business or businesses, taking on financial risk to do so.” The misconception is often the notion that you must start your own business from scratch to be an entrepreneur.

My question for you is: Why would you risk being in the 71% failure rate when you could own an already successful business that has made it to the 29% success rate?

People often wonder, what is the best industry to be in? The truth is, all industries offer potential. The real question is who is the best person for a particular industry? Even further, what model is best for what person in a certain industry? The choices can be overwhelming and direction can be skewed by misconceptions, ill-advised advice and financial limitations.

The most common forms of acquisition when becoming your own boss is:

- buying an already existing, privately owned business

- Buying an already existing franchise location

- Opening a new franchise location

Whether you buy a franchise or a private business, one thing is guaranteed. The framework for a successful business has already been put in place! When you take advantage of this option, your position as an entrepreneur instantly becomes stronger with a lower chance to fail!

Before you decide to make yourself a statistic, do yourself a favor and consult with American Business Finders. We guarantee that we will look out for your best interest and provide unbiased professional advice giving you the best opportunity to succeed. After all, our business is your business, and without your success, we fail. There is no charge to learn what you are capable of. Remember, learning creates knowledge and knowledge is power!

Todd Kuball and Steve Bartlam
American Business Finders
855-545-SOLD (7653)
info@americanbusinessfinders.com
www.americanbusinessfinders.com


Pipeline 2nd edition

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welcome to american business finders
American Business Finders

We service Minneapolis, St. Paul, Duluth, Rochester, St. Cloud and all surrounding areas. We are Business Brokers specializing in helping business owners sell their business in a confidential manner to qualified buyers!
About American Business Finders
We are dedicated to providing professional and confidential services to business owners and business buyers. Read More…
Selling your businessSelling your business is a major decision! You have devoted your time, money, and energy Read More…
Buying a Business

It can take you twice as long and cost twice as much to start a business up from scratch. Buying someone else’s business provides excellent benefits including Read More…

Follow Us On Facebook and Twitter

Facebook Twitter

Please see below a few Featured Businesses for Sale through American Business Finders. We encourage all of our members to inquire and network these opportunities to investors, business people, friends or family. You can also contact us for more information by calling us at 1-855-545-SOLD (7653)
Businesses
  • $139,999…Sporting Good Manufacture – Multiple Patents with Industry Leading Regional, National, and International Vendor Accounts

    Established and Well Known Throughout the Industry with Great Sales History for Over a Decade. Huge Potential for Growth and Innovation…Read More

  • $3,700,000…Northern Minnesota Waste Management Hauler with Trucks, Containers, Equipment and Landfill Available>
    Waste Management Hauling Company with Almost 60 Year in business. Very Profitable with 80 Acres Available…Read More
  • $2,500,000…Midwest Winery with Great Sales, Very Profitable and even larger growth potential

    With Over $2million in Assets and Budgeted 2011 Sales of $1.8million, approx 20 Acres This Winery Is a Great Success…Read More

Franchises
  • Highly Ranked International Industry Leading Health & Fitness facility Franchise

    Become the Owner of a World Class International Health & Fitness Franchise in the Midwest…Read More

  • Well Established Painting Franchise with National Exposure

    Extremely Rewarding Franchise with Great Support and National Exposure. No Paint Experience needed for the Business Minded…Read More

Other
  • $55,000…Top Sporting Goods Major Regional, National, and International Vendor Accounts

    Bring your outdoors company to the next level with the addition of these current major vendor Accounts…Read More

American Business Finders can help you buy or sell a business in Minnesota and throughout the Midwest. Please visit us at www.AmericanBusinessFinder.com or email us at info@americanbusinessfinders.com

To unsubscribe to this e-mail at any time, please reply with the word “unsubscribe” in the subject line

Licensed by Network Realty Inc

11995 Co Rd 11 Ste 220

Burnsville MN 55337 Office: (952) 583-3860 Toll Free: 855-545-SOLD


What is a Business Broker?

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A great question asked frequently my field is what exactly is a business broker. We have been compared to commercial real estate agents, and although it is a prerequisite in some states to be licensed, it really is not the same thing. A RE agent is selling real property while our main focus is on the business and assets. While some transactions do involve real estate, we mainly deal with leases and/or some sort of rental agreement. Our differentiator is our knowledge of how to market a business in arenas that might not necessarily be entered if going at it alone. We are educated on how to create opportunities and find qualified buyers to present to current businesses for sale.
We focus on working under strict confidentiality agreements to protect the sellers. Take for example, you own a machine shop and have made a great living while building a financially stable business and now would like to look at retiring or settle down. If you put a “for sale” sign in your front window, not only will you detract new potential clients but you will probably alienate your current clients. This could only be the start of your problems. Now you have to deal with your employees potentially leaving or creditors looking at your business in a different light. Now your businesses may not be seen as a strong entity and potential buyers may be more hesitant to spend what you truly deserve. The possibility of getting more for your business could be greatly decreased due to all of the above. Most businesses deserve more and most sellers will tell you that.
We do all the work while you stay focused on your day to day business! We walk you through the valuation, pricing and full disclosure marketing plan. When it comes down to it, the most stressful part is the inevitable negotiations with the buyers. We have a fiduciary responsibility to always work in the best interest of our clients and we do!! Good Brokers should have great communication, be open and honest about how they will market and sell your businesses. A good Broker will always have facts to back up what they say or do whether it is pricing your businesses or providing information on their networking or marketing.
If you know someone looking at buying a business or are interested in speaking to someone about selling their business, we ask that you just give us a call. We will never pressure you to work with us but I believe that you will be impressed with what we have to offer. We offer a no hassle, no obligation meeting that should help you in making any decisions for the future…we stand behind everything!


How to Find a Business Broker?

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Selling your business is a major decision! You have devoted your time, money, and energy to building, running, and operating your business. It may well represent your life’s work. You may have already decided that now is the right time to sell, and you want the very best professional guidance you can get. You’ve decided to sell your small business and now you’re ready to introduce your company to the business-for-sale market. For most sellers, a broker can help find a buyer and assist with your exit strategy. Choosing the right broker is important in order to maximize the sale price for your business and fund your next venture or retirement of your dreams.
The first step to finding the best broker is to know what traits to look for.

The business-for-sale market is littered with average brokers, but the best ones share the following characteristics: Read the rest of this entry »


Do You Have What it Takes to Succeed in a Business?

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Do You Have What it Takes to Succeed in a Business? -from GLOBAL BX

The one trait the majority of all millionaires have in common is that they owned their own business. Every year thousands of people attempt to follow in their footsteps and start their own business. Failure rates are high for new businesses with over half of them out of business within five years. How do you avoid this fate? There are certain things you can do that will let you succeed at your own business. Here are the skills sets that successful business owners say are critical to have if you want to succeed.

Defined Goals
The one thing that separates successful companies from failures is planning. If you want to succeed then you need to have a well-defined plan. This plan should be in writing and it should include step-by-step directions. This plan will be your roadmap that shows the best and quickest way for you company to gain Read the rest of this entry »