Tangible Assets

The most commonly purchased tangible assets are merchandise inventory, equipment and fixtures, and supplies. If the business you plan to purchase sells on credit you probably will take over accounts receivable.

What is the condition of the inventory you are purchasing? Is the stock current, clean, well-balanced, in good condition? How much of it will have to be disposed of at a loss or given away? Make a careful appraisal of the stock. Each item should be separately priced and given a reasonable value. If at all possible, the inventory should be "aged"; that is, the length of time each group of items has been in stock over 18 months old,1 year to 18 months, 6 months to 1 year, and less than 6 months should be calculated. Usually, the older the inventory, the less its value.

Examine equipment and fixtures carefully. Remember you are buying second-hand furnishings with only a percentage of their original value. Be sure equipment is in working order. Find out its age. Obtain evaluations of similar equipment, new or second hand, from dealers. Not only should you know how much equipment and fixtures have depreciated, but how obsolete they may be. Office equipment may be in working order, but so obsolete that to use it would be inefficient and costly. Also, it may be difficult to obtain repair parts for old equipment in case of a breakdown. Store fixtures quickly become out of date. New, modern fixtures attract customers. Machines used in factories may have been superseded by far more efficient equipment. To pay an exorbitant price for old machinery, no matter how good its condition, is most unwise.

Make certain how much of the asking price is for furniture, fixtures and equipment. The business may not warrant the investment which the owner made. And, finally, find out if there is a mortgage on any of the fixtures or equipment, or if they even have been completely paid for.

If you are taking over the assets such as accounts receivable, credit records, sales records, mailing lists, or leases, investigate them closely. Accounts receivable should be aged to determine how many of them may be so old collection will be difficult or impossible. On the other hand, records and contracts involving favorable leases have real value. Make certain these are included in the sale.

Goodwill

Over and above the total appraisal of inventories, fixtures, equipment, and other assets, there will usually be an amount asked for goodwill. Do not confuse it with "net worth", which is the difference between the dollar values of the assets and liabilities of the business. Rather it is the ability of the business to realize a higher rate of return on the investment than ordinarily in the particular type of business because of the favorable public attitude created by the owner. When goodwill exists, it is a valuable asset. Be realistic in determining how much you should pay for goodwill.

No fixed formula can substitute for good judgment. Since you are paying for favorable public attitude, make an effort to check it. Question customers, bankers and others whom you feel have unbiased opinions. Who will have the goodwill after the business changes hands? Does it go with the business, or is it personally attached to and will it remain with the seller?

Consider also that there may be "ill will" attached to a business. customers may be unhappy with the business. You will have to overcome these ill feelings to become successful.

The term "goodwill" is in some ways an accountant's fiction designed to explain the difference between the real price and the net worth. Accountants usually favor writing off this "goodwill" in a short period of time. A test of the amount asked is to compare it with past profits of the business. How many months or years will it take before the "goodwill" can be paid for out of profits? During that period you will, in effect, be working for the seller rather than for yourself. Another way to judge the value of this intangible asset is to estimate how much more income you will receive by buying the going business than by starting a new one.

Or compare the price asked for goodwill with that asked for goodwill in similar businesses. In other words, if you are shopping around for a business, compare not only the total prices asked, but the amounts asked over and above the reasonable value of the net tangible assets.

Liabilities

Be sure the seller pays off accumulated debts before you pay the money agreed upon in the terms of the sale, so the business is 'clear'. Find out if there are mortgages, back taxes, liens upon the assets, or other creditors' claims. Obtain full information about any undelivered purchases for which you will be liable. Although it is generally not desirable to assume any liabilities, it may be necessary in some instances. If liabilities are assumed, be sure their value is subtracted from the agreed-upon value of the assets.

The Price

After you have determined what you believe to be net value you will still not have reached the final price to be paid for the business. Value relates to what the business is worth. Other factors which affect the final price must be considered. Only then can you begin to determine the final price through negotiation and bargaining.

Say that you're the type who's starting new small business. You Have given focus to the general opportunities for success, and
have chosen the new business you want to establish.

What practical problems will you face in establishing the organization? How Much money will you need for beginning new small
business? Where can you get it? What form of business organization will you own? Where should you locate the company? (start
business tips to follow)

The first question you want to reply is: How much cash will I need? However, this question can not be answered until several other
questions are answered and several decisions are made.

To decide how much cash is Required to start a business, enter all Of your prospective income and all of your planned expenses
onto a job sheet or kind.

Though you might feel that This Type of planning is more than You have to initiate a simple small business it is beneficial to get
started with this particular approach to management which puts down figures in black and white. You will find the same approach
valuable within an established business.

First, estimate your sales quantity. This will depend on the overall Amount of business in the region, the number and ability of
competitors now sharing that company, and your own capability to compete for the consumer's dollar. Obtain assistance in producing
your sales estimate from wholesalers, trade associations, your banker, along with other business-people. A number of company and
statistical publications could be useful in making sales volume quotes.

In reaching your final estimate of sales don't be over-enthusiastic. A brand new company generally grows slowly at the start.
Should you overestimate sales you're likely to spend too much in gear and first inventory, and devote yourself to thicker
operating expenses than your actual sales volume will warrant. Since you're just starting up you may have no sales for the first
few months. At any rate you can expect your first few months to be very low.

You must also determine what percentage of your sales will be money And what proportion will be offered on credit. If you guess
that a certain part of the sales will be on charge then you must figure when you are likely to have the money for all these
earnings. 1 month? Two months? More? Never?

In our guide to starting new small business, estimate how Much cash will be paid out. Remember in starting a company you might be
purchasing gear, paying fees and licenses, which makes deposits on lease, utilities and so on, several months until you open the
doorway. A few of those expenses are easy to estimate. If you have opted to lease a building (more about that later) then you
understand what your deposits will be and just how much you will have to pay out each month. You can probably get the cost of
fees, permits and utility deposits with a few telephone calls.

Other cost figures may take a bit more work to get. One way Is to acquire average operating ratios for the kind of company in
which you are interested. One of the sources for such ratios are Dun & Bradstreet, Inc., trade associations, publishers of trade
magazines, technical accounting firms, industrial companies, and schools and universities. The normal ratios for your type of
company multiplied by your projected sales volume will serve as bench marks for estimating the various items of expense. But do
not rely solely on this method for estimating each expense item. Verify and modify these estimates through investigation and
quotes in the specific market area in which you plan to operate.

Do not forget to pay yourself too. You Might Need cash to live on if You have to quit your job. If your spouse is working and can
encourage the household for a while you might not need to withdraw money from the company. The more time you can go without taking
cash from, the faster you'll build up a solid cash position. Now that you have estimated your cash receipts and expenses, write
down the quantity of money you'll put into the business to begin. This goes online 1 in the example below. Then add lines 2 and 1
for your first month to find line 3. Then add up all the expenses to find line 5. Subtract line 5 from line 3 to get line 6. This
money at the end of month then goes to line 1 to the beginning of the next month, etc.

Should you continue this for the Whole year, very shortly you will find You have negative amounts or a negative cash flow. About
this time you'll also realize that you should be working on this form with a pencil which has a good eraser.

In this overly-simplified illustration, you see that from the end of June you're minus $200 in money. Two options can be tried -
reduce your buys at June by $200 or begin with $200 more. You may be unable to reduce expenses (they will probably go up as your
company starts). So you will have to put in $200 more to start with. If all you've got is 4000 then the extra $200 you will need
is capital you need to get from somewhere else.

Do not be misled by this simple illustration. Many small businesses Start with the $200, and try to get the $4000 from somewhere
else. Since a Major reason for failure in the first stages of a business is Under-capitalization, be very careful on your
preparation at this point. You can Almost always aim on several unexpected expenses and some flaws in expected income.

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