Tuesday, May 4, 2010

Goodwill Not Another Asset

Goodwill is not a different class of assets, but rather it is the result or end product of using tangible net assets to create value. In many respects, good will can only be recognized after a business has been value and sold, as opposed to it being part of the valuation process!

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Saturday, May 1, 2010

Q&A Explains Interest and Depreciation

Why does our valuation approach not use EBITDA? Because it is only one of many valuation methods, and we think it is a better method for conducting an apples to apples comparison of large corporations than it is for actual valuations of relatively small printing firms - those under $10 million in sales.

Visit www.printshopsforsale.net and then go to our Q&A section where author Larry Hunt has provided our take on EBITDA, depreciation, interest and amortization as it applies to valuations.

Huge Notes to Stockholders

When was the last time you looked at your balance sheet? If you're like many, it has probably been quite a while.

Unfortunately, the first time many owners really take a serious look at their Balance Sheet is when the attempt to apply some valuation formula. Unfortunately, what they often see is a Net Worth line distorted by entries for "goodwill," "amortization," and notes payable or receivable from various officers and owners.

If you expect to sell your business be advised a buyer is not really going to be interested or willing to pay you back for all the money you have loaned the business. If the business has any value, it should have already done so or be in the process of doing so!

If the debt is owed to a finance institution or a leasing company then "yes" that has to be taken care of... it is a legal obligation and someone will have to pick it up. On the other hand, that $25,000 you loaned the company three years ago to keep it afloat is still on the books. It actually increases your company's net assets and thus net worth, but is it a real net asset?

One of the best things you can do is to recast your balance sheet in terms of ONLY tangible assets and liabilities. Then take a look at any personal notes payable and receivable and take care of these, even at the expense of paying them off before you take out a salary. Yes, you should be able to do both, but if you can only do one, clean up the balance sheet!

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Allowances for Capital Expenditures

There is little doubt that our industry is capital intensive, requiring constant replacement and upgrades of equipment and software.

When valuing a business it is important that the business you anticipate buying (or the one you are selling), is able to afford three things:

(1) Pay you a "living salary" according to a formula outlined by Larry Hunt and myself.

(2) Be able to fund and support various capital expenditures during the 2-4 years the business is being purchased or sold. This is the specific reason why we do not include "Depreciation" or "Interest" payments as part of owner's cash flow or owner's compensation. For most small businesses, these are ordinary and very real expenses of a small business. They are not merely paper transactions that can be dismissed with accounting tricks and terms.

(3) All the while, the business must also be able to consistently generate enough excess earnings to pay the seller his asking price. Yes, that's quite a task, and that's why most businesses are worth very little and while many more simply close their doors.

To quote one source, "You must deduct appropriate amounts from the "owner's benefits" number in order to determine both the true value of the business as well as its ability to fund future expenditures."

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