Barackoli.com - Business Talk

Perhaps you were recently an employee and you received some money from a severance package, or an early retirement offer.  Alternatively, you could have just graduated high school, college or university and you’ve decided to give owning your own business a try.  You could just be sick and tired of working for someone else or a homemaker who’s looking for a business opportunity.

Regardless, of the reasons why you are thinking of buying a business, if you find yourself short of funds and in need of financing here are a few tips.

The first thing you should do when deciding to purchase a business is develop a business plan.

The process of developing a business plan has numerous benefits and will focus a purchaser on issues they may not have considered.  This could include marketing issues, who their competitors are, cash flow issues, what the ongoing fixed cost of the business is, what aspects of the business are more profitable than others and how important the current owner is to the business, just to name a few.

When you evaluate a business both for the purchasing price and financing concerns, it’s important to separate the assets of a business into two categories:
- Tangible (or fixed) assets and
- intangible assets  (or goodwill)

Tangible assets are assets which can be listed and have some value, this includes computers, office equipment, vehicles, inventory and countless other items.

Intangible assets are usually related to goodwill of some kind. Goodwill in a professional practice such as accounting, is usually defined as clients of the business who are ongoing, meaning that they return year after year and there is some predictable element associated with these clients and the revenue they generate. Other businesses may definite goodwill as general revenues which are predictable or the goodwill maybe in the value of the businesses clients and/or prospect list.

For accounting purposes, goodwill is generally defined as the price paid for a business in excess of the fair market value of the fixed or tangible assets.

For financing purposes, the distinction between tangible and intangible assets is very important.  The reason being that the bank is much more likely to finance tangible assets in comparison to intangible assets and as such, the financing strategies differ depending on the degree between the two categories.

To illustrate the difference between two different types of assets consider these two extreme illustrations:
- Buying a business consisting largely of fixed assets
- Purchasing a business based on goodwill, (ie no fixed assets)

Let’s say you are considering buying a business consisting mostly of fixed assets.  Naturally to determine if the asking price is reasonable and to decide what a fair value of the business is, your going to ask for a list of the fixed assets.  Perhaps this list includes the fair market value, perhaps not, either way this needs to be determined.