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Atricle Dump - Sanity Check - Buying A Business
Library cubicles are independent study rooms for individuals. They are meant for individuals who need to spend more time in reference work. The cubicles are a calm and quiet place to go through available study material.In colleges and universities, library cubicles are specially made for graduate students and faculty members. It can be used by those individuals doing research work and handling special projects. With limited number of cubicles, individuals need prior permission from library members to make use of the cubicles. There is need to follow certain rules and regulations to access cubicles.Library cubicles are complete with shelves for books. The books and journals in cubicles are available for references and consultations and cannot be taken home, in most cases. The cubicle shelves come with or without doors. Locked cubicles are mainly given for faculty members with long term projects and research work. Such cubicles are usually shared by two or more persons to keep valuable books and other related materials safe and secure.There are cubicles equipped with computers, DVD, and VHS players. With computers, individuals can utilize Internet facilities that are needed for study. Moreover, some institutions provide facilities for intranet access.Library cubicles are considered one of the best possible ways to study in a calm environment. There are individual and group study cubicles in libraries. Some cubicles are assigned for scholars and researchers. Single cubicles are smaller in size and shared cubicles are a bit larger. Almost all cubicles have space enough to keep manuals and other study materials. But it does not have much space to spread out and study. However, the place is ideal to concentrate on studies with minimum distractions.Library cubicles are available on rental basis. Terms and conditions vary.
Putting your money in a bank has little risk, because the Federal Government insures your deposits in the bank. The stock market has a lot of risk that many people do not fully understand, causing them to accept a long term ROI of 10-13% from mutual fund investments. A 95% drop in stock prices like the dot.com stocks or what happened when we had the oil embargo in 1992 are indications that the stock market can be a much higher risk than people realize.
I personally feel that owning your own business and buying real estate are much lower risks, providing a much higher return. The proof of this can be found in the number of people who got rich in real estate and the over 25 million small business owners across this country.
Figure out what ROI you want and
You don’t have to be a genius to recognize that a lot of money is tied up in MRO inventory ….especially if your business requires the use of capital-intensive equipment. Literally millions of dollars are tied up in spare parts for day-to-day Maintenance, Repair and Operations (MRO).Historically, no one ever really ‘owned’ inventory, so stocking another item “just in case” had very few, if any repercussions. Inventory was often seen as a necessary evil of doing business. The term Inventory Management was almost an oxymoron. There were few procedures for setting up an item, no standard structure or format. Item information was written in the manner of each individual….first onto cards, which were later transcribed into a computer system. More often than not, there were no stock review processes. The only ‘management’ of inventory came with its annual physical count undertaken for financial reporting purposes.Typically over time, Stores inventory grew… and grew… and grew… to the point where the numbers were just too big to ignore. That’s when inventory gets the attention of management: when the numbers are just too large to ignore any longer. After all, that’s real money tied up in parts. Good money… paid out to suppliers… for maintenance workers’ peace of mind.The ironic thing is that maintenance workers do not often have much confidence in Stores inventory. They do not trust that parts are really there in the quantities stated, or that they are still usable. They might even keep a private cache of parts hidden somewhere for their own use. Or they might by-pass Stores altogether and just order the part directly from the supplier. These scenarios are real and they add further to costs.When a formal inventory review is undertaken, we often find that unfortunately, many item descriptions are inadequate, with spelling errors or
The beauty of this process is; how long you want to spend on doing this activity is totally up to you. As we review this process, I will explain the variables of this system so you can make the necessary decisions where needed. Remember, this is only a tool to help you make decisions about a business purchase; it is not a sure-fire foolproof system. I will just lay it out for you and you make your own decision as to the validity of this formula for analyzing a business purchase that you may want to make.
The Sanity check requires two mathematical formulas, which require dollar amounts or other numbers to be entered in each formula. The math is calculated and then the results are compared against the purchase price. If it doesn’t work out the way you wanted, you have the option of then going back and change some of the numbers and do the calculation a second time.
The two formulas are:
1. SP + WC – BF = CR
Sale Price + Working Capital - Borrowed Funds = Cash Requirement
2. SDE – FMW (FO) – DS - ROI = Extra Profit/Loss
Sellers Discretionary Earnings - Fair Market Wage (for the owner) - Debt Service - Return on Investment (Cash Requirement x Interest rate -Stated as a Percentage) = Extra Profit/Loss
Since each item in the formula needs to have a dollar amount determined, we will define the terms and then discuss how the dollar amount is derived at.
Terms Definition:
Sale Price: The price that is being asked for the business or the price the buyer is thinking of offering. Depending on when you do this analysis. If you are trying to determine an asking price you would calculate all the other numbers in these two formulas to determine what should be your offering price. We will do examples to make this clear later in this article.
Working Capital: The short-term assets minus the short-term liabilities is the accounting definition. The simple explanation would be the amount of money necessary to be invested by the buyer to run the daily operations of the business, once purchased. This would include monies tied up in inventory, and accounts receivables. Money invested to pay the landlord’s or utility company’s deposits. Also included is the money spent on the business purchase to cover the loan origination costs and purchase escrow fees when buying the business. It is the total funds invested into the business to keep it running. The down payment given to the seller is not part of this number, since it is included as a separate item.
Calculation notes: 1. Cost of inventory: $_________________ (+) 2. Accounts receivable: $_________________ (+) 3. Landlord deposit: $_________________ (+) 4. Utility Deposits: $_________________ (+) 5. Escrow fees to purchase: $_________________ (+) 6. Loan origination costs: $_________________ (+) 7. Short term liabilities* $ _________________ (--) Total Working Capital $_________________
* Short-term liabilities are defined as liabilities that are to be paid off within 1 year – accounts payables and the part of any notes payable that are to be paid within 1 year.
Borrowed Funds: The loan made for a business purchase from a bank or private party. The private party can be the seller or some friend or relative who might be willing to make a loan. This is borrowed money that must be paid back to someone at some time in the future.
Cash Requirement: This is the invested cash required to both buy a business, and working capital-to run the business. The amount of cash needed to make the business purchase and run the operations of the business after deducting all borrowed funds, regardless of source.
Sellers Discretionary Earnings / Owners Total Benefits: This is the total of all the non-business related benefits going to a business owner or his family on an annual basis that have been paid for, by the business. Included in this is definition are taxable profit from operations, unreported cash income, owners salary, salaries to non-working family members, any amount over the fair market value of salaries paid to working family members, family auto expenses, family telephone, family office expenses, health and life insurance for any or all family members, pension plan/ profit sharing contributions paid for the benefit of family members. This can also be stated as the reason why most people go to work everyday; they get family support for working.
Calculation notes: 1. Taxable profit from operation $_________________ (+) 2. Cash $_________________ (+) 3. Owners Salary $_________________ (+) 4. Salaries of non-working family members $_________________ (+) 5. Amount over the fair market value of wages of working Family members $_________________ (+) 6. Family Auto Expenses $_________________ (+) 7. Family Telephone Expense $_________________ (+) 8. Family Office Expense $_________________ (+) 9. Health and Life insurance of Any/all family members $_________________ (+) 10. Pension plan/profit share family members $_________________ (+) Total Seller Discretionary Earnings: $_________________Return on Investment: We need to have this stated as a dollar amount in Formula two. ROI is calculated as follows:
Cash Requirement X “a Percent” - the greater the risk, the higher the percent
First we must determine what the interest rate return we wish on our investment. This is a very subjective percentage and a change in this number can change the whole result of this analysis. If it is of any help, many financial investors in “Corporate America” feels they need to get a 20% return on their invested capital. Companies do not always make money and therefore the possible loses are built into the ROI. Some of the reasons are: companies are bought and go broke, overseas competition causing expectations of growth and income not to be met, and lastly government regulations periodically close whole industries. These are just some of the many risks involved in owning a business.
Putting your money in a bank has little risk, because the Federal Government insures your deposits in the bank. The stock market has a lot of risk that many people do not fully understand, causing them to accept a long term ROI of 10-13% from mutual fund investments. A 95% drop in stock prices like the dot.com stocks or what happened when we had the oil embargo in 1992 are indications that the stock market can be a much higher risk than people realize.
I personally feel that owning your own business and buying real estate are much lower risks, providing a much higher return. The proof of this can be found in the number of people who got rich in real estate and the over 25 million small business owners across this country.
Figure out what ROI you want and
Starting a new business can be a daunting task. There are hundreds of decisions to be made. Who, what, where, and when are not just for English class anymore. Another question that must be answered is “What form will my business be?” There are several factors to be considered and there are pros and cons for each type. In this article, I will try to briefly explain the differences between the business forms.Sole Proprietorship: Most people are familiar with this type of business. This form is one person or married couple that usually operate the business by themselves. This is the “Mom and Pop” type of store. The owner receives all of the income from the business but is also responsible for all for the liabilities that the business incurs. The income or loss is also reported on the personal income tax of the owner. Most small businesses are started as this form of business. This is the easiest of all of the types of businesses to open.General Partnership: In this type of business organization, there are two or more partners. The income is split between the partners, usually based on the amount of money or assets that each partner invests in the business and each must report his share of the income on his personal income tax form. Each of the partners have unlimited liability for the debts of the business partnership. Another drawback to this type is problems can arise between the partners. However, sometimes another opinion in a decision is just what a business needs.Limited Partnership: A limited partnership is similar to the general partnership. All of the general partners have an unlimited liability for the business debts. However, a limited partners liability, as the name implies, is limited to the amount of the contribution that he has made to the busines
2. SDE – FMW (FO) – DS - ROI = Extra Profit/Loss
Sellers Discretionary Earnings - Fair Market Wage (for the owner) - Debt Service - Return on Investment (Cash Requirement x Interest rate -Stated as a Percentage) = Extra Profit/Loss
Since each item in the formula needs to have a dollar amount determined, we will define the terms and then discuss how the dollar amount is derived at.
Terms Definition:
Sale Price: The price that is being asked for the business or the price the buyer is thinking of offering. Depending on when you do this analysis. If you are trying to determine an asking price you would calculate all the other numbers in these two formulas to determine what should be your offering price. We will do examples to make this clear later in this article.
Working Capital: The short-term assets minus the short-term liabilities is the accounting definition. The simple explanation would be the amount of money necessary to be invested by the buyer to run the daily operations of the business, once purchased. This would include monies tied up in inventory, and accounts receivables. Money invested to pay the landlord’s or utility company’s deposits. Also included is the money spent on the business purchase to cover the loan origination costs and purchase escrow fees when buying the business. It is the total funds invested into the business to keep it running. The down payment given to the seller is not part of this number, since it is included as a separate item.
Calculation notes: 1. Cost of inventory: $_________________ (+) 2. Accounts receivable: $_________________ (+) 3. Landlord deposit: $_________________ (+) 4. Utility Deposits: $_________________ (+) 5. Escrow fees to purchase: $_________________ (+) 6. Loan origination costs: $_________________ (+) 7. Short term liabilities* $ _________________ (--) Total Working Capital $_________________
* Short-term liabilities are defined as liabilities that are to be paid off within 1 year – accounts payables and the part of any notes payable that are to be paid within 1 year.
Borrowed Funds: The loan made for a business purchase from a bank or private party. The private party can be the seller or some friend or relative who might be willing to make a loan. This is borrowed money that must be paid back to someone at some time in the future.
Cash Requirement: This is the invested cash required to both buy a business, and working capital-to run the business. The amount of cash needed to make the business purchase and run the operations of the business after deducting all borrowed funds, regardless of source.
Sellers Discretionary Earnings / Owners Total Benefits: This is the total of all the non-business related benefits going to a business owner or his family on an annual basis that have been paid for, by the business. Included in this is definition are taxable profit from operations, unreported cash income, owners salary, salaries to non-working family members, any amount over the fair market value of salaries paid to working family members, family auto expenses, family telephone, family office expenses, health and life insurance for any or all family members, pension plan/ profit sharing contributions paid for the benefit of family members. This can also be stated as the reason why most people go to work everyday; they get family support for working.
Calculation notes: 1. Taxable profit from operation $_________________ (+) 2. Cash $_________________ (+) 3. Owners Salary $_________________ (+) 4. Salaries of non-working family members $_________________ (+) 5. Amount over the fair market value of wages of working Family members $_________________ (+) 6. Family Auto Expenses $_________________ (+) 7. Family Telephone Expense $_________________ (+) 8. Family Office Expense $_________________ (+) 9. Health and Life insurance of Any/all family members $_________________ (+) 10. Pension plan/profit share family members $_________________ (+) Total Seller Discretionary Earnings: $_________________Return on Investment: We need to have this stated as a dollar amount in Formula two. ROI is calculated as follows:
Cash Requirement X “a Percent” - the greater the risk, the higher the percent
First we must determine what the interest rate return we wish on our investment. This is a very subjective percentage and a change in this number can change the whole result of this analysis. If it is of any help, many financial investors in “Corporate America” feels they need to get a 20% return on their invested capital. Companies do not always make money and therefore the possible loses are built into the ROI. Some of the reasons are: companies are bought and go broke, overseas competition causing expectations of growth and income not to be met, and lastly government regulations periodically close whole industries. These are just some of the many risks involved in owning a business.
Putting your money in a bank has little risk, because the Federal Government insures your deposits in the bank. The stock market has a lot of risk that many people do not fully understand, causing them to accept a long term ROI of 10-13% from mutual fund investments. A 95% drop in stock prices like the dot.com stocks or what happened when we had the oil embargo in 1992 are indications that the stock market can be a much higher risk than people realize.
I personally feel that owning your own business and buying real estate are much lower risks, providing a much higher return. The proof of this can be found in the number of people who got rich in real estate and the over 25 million small business owners across this country.
Figure out what ROI you want and
Our point of view, perception, and learning are all objects of our knowledge, and these are things that prevent us from going ahead. "I already know everything there is to know about that. I don't need to learn any more." We have arrived only at the fourth rung of the ladder, yet we think it is the top rung. Whatever the value of what our intellect and our insight has attained, we have to abandon it. If we don't, we put an end to further progress. Even though it has some value, our knowledge has become an obstacle. If we are caught in our knowledge, if we say that our knowledge is absolute truth, we suffer from the knowledge-obstacle. Those who have knowledge but know that they have to abandon it in order to go further do not suffer from the knowledge-obstacle.Objects of knowledge are like water that has become ice and prevents the river from flowing. We need knowledge, but we have to use it intelligently. If we think that our present knowledge is paramount, our way is blocked. Our knowledge has become an obstacle. We cannot [or should not] be attached to anything; we have to abandon even our insight, our understanding, and our knowledge [to be truly free].Have you ever wondered sometimes the CEO of a company might not even be experienced in a certain business that the Company is engaged in? The reason could be that, for the CEO to be a visionary, he or she should not be suffering from the knowledge-obstacle.You might not need to hire a new CEO, but you can always train your R and D team to understand that they have to abandon their knowledge and expertise in order to go further, and thus not suffering from the knowledge-obstacle.
Calculation notes: 1. Cost of inventory: $_________________ (+) 2. Accounts receivable: $_________________ (+) 3. Landlord deposit: $_________________ (+) 4. Utility Deposits: $_________________ (+) 5. Escrow fees to purchase: $_________________ (+) 6. Loan origination costs: $_________________ (+) 7. Short term liabilities* $ _________________ (--) Total Working Capital $_________________
* Short-term liabilities are defined as liabilities that are to be paid off within 1 year – accounts payables and the part of any notes payable that are to be paid within 1 year.
Borrowed Funds: The loan made for a business purchase from a bank or private party. The private party can be the seller or some friend or relative who might be willing to make a loan. This is borrowed money that must be paid back to someone at some time in the future.
Cash Requirement: This is the invested cash required to both buy a business, and working capital-to run the business. The amount of cash needed to make the business purchase and run the operations of the business after deducting all borrowed funds, regardless of source.
Sellers Discretionary Earnings / Owners Total Benefits: This is the total of all the non-business related benefits going to a business owner or his family on an annual basis that have been paid for, by the business. Included in this is definition are taxable profit from operations, unreported cash income, owners salary, salaries to non-working family members, any amount over the fair market value of salaries paid to working family members, family auto expenses, family telephone, family office expenses, health and life insurance for any or all family members, pension plan/ profit sharing contributions paid for the benefit of family members. This can also be stated as the reason why most people go to work everyday; they get family support for working.
Calculation notes: 1. Taxable profit from operation $_________________ (+) 2. Cash $_________________ (+) 3. Owners Salary $_________________ (+) 4. Salaries of non-working family members $_________________ (+) 5. Amount over the fair market value of wages of working Family members $_________________ (+) 6. Family Auto Expenses $_________________ (+) 7. Family Telephone Expense $_________________ (+) 8. Family Office Expense $_________________ (+) 9. Health and Life insurance of Any/all family members $_________________ (+) 10. Pension plan/profit share family members $_________________ (+) Total Seller Discretionary Earnings: $_________________Return on Investment: We need to have this stated as a dollar amount in Formula two. ROI is calculated as follows:
Cash Requirement X “a Percent” - the greater the risk, the higher the percent
First we must determine what the interest rate return we wish on our investment. This is a very subjective percentage and a change in this number can change the whole result of this analysis. If it is of any help, many financial investors in “Corporate America” feels they need to get a 20% return on their invested capital. Companies do not always make money and therefore the possible loses are built into the ROI. Some of the reasons are: companies are bought and go broke, overseas competition causing expectations of growth and income not to be met, and lastly government regulations periodically close whole industries. These are just some of the many risks involved in owning a business.
Putting your money in a bank has little risk, because the Federal Government insures your deposits in the bank. The stock market has a lot of risk that many people do not fully understand, causing them to accept a long term ROI of 10-13% from mutual fund investments. A 95% drop in stock prices like the dot.com stocks or what happened when we had the oil embargo in 1992 are indications that the stock market can be a much higher risk than people realize.
I personally feel that owning your own business and buying real estate are much lower risks, providing a much higher return. The proof of this can be found in the number of people who got rich in real estate and the over 25 million small business owners across this country.
Figure out what ROI you want and
Is your business in a post-holiday slump? It happens every year; service companies face a dip in business as consumers tighten the purse strings to compensate for holiday spending. Coupons may help bring in some business, but they can only do so much to improve the bottom line. So how do you keep your business in the black during the first months of the year? Try barter; it’s a great way to build your business, attract new customers, and fill downtime during slow months.Barter is a way to effectively market your business. A new customer acquired for a barter transaction can easily transition into an ongoing cash customer. Unless that customer offers a service that you routinely pay for, then you can develop a deal for an ongoing exchange of services and lower the amount you pay out for services.Barter is simple: you perform a service for someone and they perform a service for you or give you product that equals the value of your service. It’s a powerful way to build your business, in good times and bad, as long as it is used effectively. There are a few tips to leveraging barter wisely.First, never barter for something you don’t want or can’t use. Barter for things you need to buy, such as product for your company, tax services, cleaning services, or consulting. It’s also great to barter for things you want, but wouldn’t spend your hard earned cash on, like sewing machines, spa services, or that fabulous cashmere throw you just won’t buy for yourself. Remember, while it is better to barter than sit idle, only make trades that provide you with something of value.Second, set your barter appointments for when you have the most downtime. The idea is to bring in new business when you don’t have any, not turn away cash paying customers. Hair stylists often experience slow periods during the day at the beginning of the week; that’s a great
Calculation notes: 1. Taxable profit from operation $_________________ (+) 2. Cash $_________________ (+) 3. Owners Salary $_________________ (+) 4. Salaries of non-working family members $_________________ (+) 5. Amount over the fair market value of wages of working Family members $_________________ (+) 6. Family Auto Expenses $_________________ (+) 7. Family Telephone Expense $_________________ (+) 8. Family Office Expense $_________________ (+) 9. Health and Life insurance of Any/all family members $_________________ (+) 10. Pension plan/profit share family members $_________________ (+) Total Seller Discretionary Earnings: $_________________Return on Investment: We need to have this stated as a dollar amount in Formula two. ROI is calculated as follows:
Cash Requirement X “a Percent” - the greater the risk, the higher the percent
First we must determine what the interest rate return we wish on our investment. This is a very subjective percentage and a change in this number can change the whole result of this analysis. If it is of any help, many financial investors in “Corporate America” feels they need to get a 20% return on their invested capital. Companies do not always make money and therefore the possible loses are built into the ROI. Some of the reasons are: companies are bought and go broke, overseas competition causing expectations of growth and income not to be met, and lastly government regulations periodically close whole industries. These are just some of the many risks involved in owning a business.
Putting your money in a bank has little risk, because the Federal Government insures your deposits in the bank. The stock market has a lot of risk that many people do not fully understand, causing them to accept a long term ROI of 10-13% from mutual fund investments. A 95% drop in stock prices like the dot.com stocks or what happened when we had the oil embargo in 1992 are indications that the stock market can be a much higher risk than people realize.
I personally feel that owning your own business and buying real estate are much lower risks, providing a much higher return. The proof of this can be found in the number of people who got rich in real estate and the over 25 million small business owners across this country.
Figure out what ROI you want and
One of the prime features of high-quality barcode labels is durability. Durable barcode labels are vital for any industrial application and are integral for equipment marking and security. These are important for cassettes, plates, slides, vials, and laboratory and medical items.Durable barcode labels can withstand abrasion, corrosion, moisture, heat, solvents, and UV light. Accuracy, clarity, consistency, easy identification, flexibility, high quality, legibility retention, and reliability are the major advantages of durable barcode labels. Warehouse barcode labels, work-in-process barcode labels, utility asset labels, barcode labels for industrial use, asset tags for property identification, and polyester barcode labels are some examples of durable barcode labels.Durable barcode labels are available in a range of adhesive backings and are generally categorized into aluminum barcode labels, polyester barcode labels, and ceramic barcode labels. Aluminum barcode labels are able to resist wear and tear and harsh chemicals. Polyester barcode labels have permanent industrial adhesive bonding, which ensures dependability. Ceramic barcode labels are coated with ceramics and have a stainless steel base. This type of label can withstand extreme temperature and strong acids. Durable barcode labels are also made from materials like polypropylene, polycarbonate, photo anodized aluminum, and stainless steel.Quality of label stock, ribbon, printing technology, and barcode label programs employed are the primary factors, among many others, that determine the durability of barcode labels. Since they have the capability of printing long-lasting images on a range of materials, thermal-transfer printers are generally used to produce scratch-resistant, durable barcode labels. Sometimes laser printers and matrix impact printers coupled with the right media and
Putting your money in a bank has little risk, because the Federal Government insures your deposits in the bank. The stock market has a lot of risk that many people do not fully understand, causing them to accept a long term ROI of 10-13% from mutual fund investments. A 95% drop in stock prices like the dot.com stocks or what happened when we had the oil embargo in 1992 are indications that the stock market can be a much higher risk than people realize.
I personally feel that owning your own business and buying real estate are much lower risks, providing a much higher return. The proof of this can be found in the number of people who got rich in real estate and the over 25 million small business owners across this country.
Figure out what ROI you want and insert this number as .20 amount to represent 20% or .06 to represent 6% ROI. This is an annual return on invested money.
Once you have a percentage return on your investment we need to multiply it by the Cash requirement in order to come up with a dollar amount return needed. This restated is Dollars invested x percentage (stated as a decimal) = Dollar return on investment.
Examples:
1) Investment of $50,000.00 @ 6% Return On Investment (ROI) would be calculated as follows: $50,000.00 X .06 = $3,000.000 (Dollars return on investment)
2) Investment of $50,000.00 @ 20% Return On Investment (ROI) would be calculated as follows: $50,000.00 X .20 = $10,000.00 (Dollars return on investment)
Debt Service: The reason we need this number is because this is a financial expense of owning a business. It is not an operating expense of the daily business operations but if you have debt, in your business, you must be able to make the payments, out of the business operations profit. Usually this payment is mostly interest and a smaller portion is the principal reduction of the loan balance.
Most professionals deduct the whole payment when doing this analysis, because the business must generate enough profit to make the whole payment. My personal preference is to just deduct the interest portion and to add the principal portion of the payment to working capital amount needed. This counts as more money being put into the business just like financing inventory and/or accounts receivables.
For simple one-hour analyses it is not worth splitting up the payment. In the case of a very large principal reduction payment it could be unreasonable to not split it up. It is up to you. You can always try it both ways, since this is a process to raise your understanding, not to come up with a fixed answer of, yes! it is a buy or no! it is not a buy.
Fair Market Wages: This is an amount that the new or old owner would be paid, if he were an employee not the owner. If the owner were the company salesman and also the company bookkeeper working a total 60 hours a week, a reasonable salary would have to be determined for each job. As an example only, lets say that an outside salesman, in your industry, could make $40,000 per year. And a bookkeeper usually charges $15 per hour. The salesman might very well work 50 hours at this job to earn this salary. If a bookkeeper would work 10 hours per week doing the bookkeeping that would mean 520 hours per year (10 hours x 52) times $15.00 per hour which comes to $7800 per year for the bookkeeper. The two Fair Market Salaries would come to $47,800 ($40,000 + $7,800).
Sometimes the market salaries are not so easy to figure. Lets take an owner who owns a 99-cent discount type store. This shopkeeper works 70 hours per week behind a counter in the store. You can hire a counter person for $7.00 per hour so this becomes (70 hrs x $7.00 per hour x 52 weeks).
Then you start discussing that this $7.00 per hour counter person would not be able to do the buying. You might want to figure a purchasing agent's salary. This can be done or you can just do simple numbers, leaving the salary only based on a counter person’s wages.
DOING THE MATH
By now you have the information to come up with numbers to put into the formula. Let us create a scenario. This was a transmission shop. The customers pay COD-upon pick up of the car. The parts inventory is from old transmissions and show on the books as worth nothing. The seller-owner is asking $75,000 for this business that he is able to takes out $50,000 in profit or benefits. In an interview, the owner mentioned that if a buyer will put $40,000 as a down payment he would carry the $35,000 balance at 5% interest for 5 years. By observation, we can see that the current owner sits in the office and does the bookkeeping, orders parts and makes bank deposits. He has a manager who bids jobs and handles production. No one is going out and calling on prospective business, which is one thing the owner should be doing with his time, but he is not doing. Lets go through what the numbers are with this example.
Math Formula #1: Sale Price + Working Capital - Borrowed Funds = Cash Requirement
Sales Price: $75,000 Working Capital: The business requires $10,000 cash infusion upon close of escrow, mostly to pay the landlords deposits and start a new marketing campaign. Borrowed Funds: $35,000 So, the calculation for formula #1 looks like this:
Sales Price: $75,000
Working Capital (+) $10,000
Borrowed Funds (-) $35,000
=Cash Requirement: $50,000.00
Math Formula #2: Sellers Discretionary Earnings - Fair Market Wages For Owner - Debt Service - Return on Investment (Cash Requirement x Percentage) = Extra Profit/Loss
Seller Discretionary Earnings in this case is, let us say, $50,000.00.
Fair Market Wage: You can calculate what you consider fair or you can put all of the other numbers into the equation and see what is left for salary. If you like the salary you buy the business, if not you do not. If we were to calculate what the owner’s salary should be I would not pay much for what he does. Even though he puts in 50 hours a week he really only works 15 hours a week of true production. I am figuring 5 hours for bookkeeping and banking and 10 hours for ordering parts and answering phone calls. At $15.00 per hour he is earning $225.00 a week ($15.00 x 15 hours) and that multiplied times 52 weeks comes to $11,700 per year.
Debt Service: My financial calculator says that if you borrow $40,000 for 5 years (60 months) at 5% and the balance at the end of the 60-month is zero, the monthly payments come to $660.49. Since the formula requires yearly figures we multiply by 12 and get $7,925.92. Most of this payment is principal reduction but we are
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