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Finding Value in an Established Business

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If you are just beginning your investigation into finding a business, there is a lot more to consider than return on investment (ROI).

Not to mention ROOPM, or return on other people's money.

Advisers, relatives, friends, lenders and sellers each have their own formula that they use to arrive at an asking and selling price. And every buyer and buyer's relatives, advisers, friends, lenders, et cetera have their formulas too. Rarely, will everyone's formula agree.

Cash flow is cash flow. Are you willing to pay one time or five times? Do you want 100 percent return or is 20 percent reasonable? In addition to cash flow, what else are you purchasing? Unless you have started a business from zero, you won't understand the intrinsic values associated with an ongoing or failing business. Yes, even a failing business might be worth more than the face value of its assets. But, only to an educated buyer.

* Customer list. If there is an up to date customer list, what is the value? The seller may think that they only have hard assets to sell.  The buyer could be interested in growth and those customers who have purchased over the last two years. 
* Website and Yellow Page listing. If you can get a business (open or closed) and can take over its website, the phone number and yellow page contract is worth a small fortune. If you can't, you’ll need to figure out how you will get customers until you can get into the next directory or drive customers to your website.
* Accounts payable. If you are buying a business that buys merchandise at wholesale, then sells at retail, or assembles and resells, are they on a net 30, 60 or 90? Do you understand the value of someone fronting you merchandise and letting you sell it and earn a profit before you have even paid for it? (ROOPM) If you do not have those accounts, your shipments come in COD (bank check), or prepaid on a credit card, or you give money in advance to your supplier and they send you merchandise until your deposit is used up. This can go on for 6-24 months until they 'try' you at net 10-30.
* Procedure manuals. A business plan, operations manual, employee manual and independent contractor’s agreements all add value to a business. They all have a cost associated with them. And each good business has one.
* Supplier list. Arriving at a good supplier list is trial and error. Think profit and loss. Spend a few days price shopping with the telephone for whatever item you want to sell or service and see if you can see a value to having someone hand you years of research.
* Grandfather clauses. Call the building department of the city and county where you are thinking of opening and buying your business. Ask for a list of all the permits, inspections, zoning ordinances, allowed use, licenses, engineering requirements, architectural requirements, ADA requirements, sign ordinances...you get the idea. A savvy business buyer will buy a business with grandfathered use codes in order to not have to comply with today's more stringent codes. For example, a new business may only be allowed to have four square feet of signage per 1,000 square feet of occupied building space. A business that was established 10 years ago may be unlimited and using that billboard for the last 10years. Which one is more valuable?
* Equipment. Most any equipment older than 5 to 8 years is worth little if anything. Or is it? Equipment built today, is built to 'throw away' when you are done. Equipment built 20 years ago was built to last 100 years. They were built with bearings instead of bushings. (If you don't know, you won't understand or believe it!) When South Florida changed the building codes after Hurricane Andrew, it was more expensive to re-tool the newer equipment than the older equipment! Who on earth would spend eight hundred thousand dollars to re-tool equipment that was valued at $300,000 tops? The same person that saw sales jump from $3 million to $8 million while his competitors scrambled or closed their doors.

- Steve Sink

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