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What a “Business For Sale” Really Means

Having a business for sale can mean a lot of things – more than people might think. How does one business value compare to another, and how to arrive at that value? Because there are many types of businesses that exist for many different industries, it stands to reason there are numerous ways of approaching the process to find the value.

There are the three main approaches to value, which are the income approach, the market approach, and the asset approach. There are variations of these approaches, and combinations of them, and things which must be looked at because each and every business will have variations of what gives the business worth, and some of these differences are substantial.

First we must identify the type of sale: stock sale or asset sale. A stock sale is the sale of the company stock; the buyer is buying the company based upon the value of its stock, which represents everything in the business: earning power, equipment, goodwill, liabilities, etc. In an asset sale, the buyer is buying the company assets and capital which enable the company to make profits, but is not necessarily assuming any liabilities with the purchase. Most small businesses for sale are sold as an “asset sale”.

Our question, when selling a business or buying a business, is this: what are the assets considered to arrive at an accurate value? Here we will look at some of the most common.

1. FF and E: This abbreviation stands for furniture, fixtures, and equipment. These are the tangible assets used by the business to operate and make money. All businesses (with a few exceptions) will have some amount of FF&E. The value of these can vary greatly, but in most cases the value is included in the value as determined by the income.

2. Leaseholds: the leasehold is the lease agreement between the owner of the property and the business that rents the property. The agreed upon leased space typically goes with the sale of the business. This can be a significant value, especially if there is an under market rate currently business charged and the lessor is obligated to continue with the current terms.

3. Contract rights: many businesses do business based on ongoing contracts, agreements with other entities to do certain things for certain periods of time. There can be immense value in these agreements, and when someone buys a business he or she is buying the rights to these agreements.

4. Licenses: in certain business sales, licenses do not apply; in others, there can be no business without them. Building contracting is one of them. So is accounting. For a buyer to buy a business, his purchase includes either buying the license to the company or the license to the individual. Often times, the buyer will require the access or availability of the license as a contingent element of the sale.

5. Goodwill: Goodwill is the earnings of a business above and beyond the fair market return of its net tangible assets. In other words, whatever the business makes in excess of its identifiable assets is considered “goodwill” income, where there exists a synergy of all of the assets together. This one can be tricky. Most business owners assume they have goodwill in their business, but goodwill is not always positive; there is such things as “negative” goodwill. If the business makes less than the sum total of its identifiable assets, there exists negative goodwill.

6. Trade secrets: some businesses are all about secrets. The reason the business is in operation may be because of a trade secret, some aspect of a product or service that sets it apart and gives it a market. In a business purchase, these secrets have value and go with the sale.

7. Trade names, telephone numbers, websites, and domain names: some businesses generate business simply because of its name and identifiable aspects. If those were to change, so would the profits. So in buying a business, the buyer will have need of those names and numbers to continue on in business. Of course, in some cases these things would not matter at all, and that is why each one must be approached individually.

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