© Copyright 2002-2003. All rights reserved.
Page 16
How To Investigate Any Business Opportunity
flows of $785 yields a value for the business of $1,083.
Although this formula is widely used, it cannot be applied in this simplistic form to arrive at a definitive
value conclusion. It fails to address issues such as the buyer's working capital investment, the terms of
the transaction, or the valuing of assets like real estate which may not be needed to produce the pro-
jected cash flows. However, it is useful in establishing a price range for negotiation purposes.
7. The Role of Advisors
A variety of resources are available for those buyers and sellers wanting to obtain professional advice.
These resources include business owners in the industry, industry consultants, professional intermediar-
ies, business valuation experts, accountants and attorneys. Each of these resources can be of assis-
tance and each has its limitations Business owners, consultants, and intermediaries are the best source
of industry information and operating suggestions. Business owners may be able to give free advice,
and they are often the best source of information. No one knows more about an industry than someone
who is successfully running a business in that industry, Business valuation experts can independently
appraise a business's value. Bear in mind, however, that they rely on the representations of the seller.
They render a conditional opinion based on the assumption that the financial statements are accurate
and complete. They will attempt to independently verify only certain information.
Accountants are best used to perform an audit (if one is needed), help interpret financial statements, or
provide advice in structuring the transaction to minimize tax consequences for the buyer and seller.
Probably the most often consulted advisor in the purchase or sale of a business is an attorney. Attor-
neys are asked to do everything from assessing the viability of a business and appraising its value to
negotiating the purchase price and preparing the necessary documents. Attorneys, however, cannot as-
sess the viability of a business undertaking. That is something only the buyer and seller can do. Attor-
neys also generally cannot value a business, but they can occasionally help negotiate a price between
buyer and seller. The involvement of an attorney (or any individual other than the principals) can, how-
ever, strain the lines of communication between buyer and seller, so they should be allowed into the ne-
gotiation process only after careful consideration.
The primary function of an attorney is to prepare the purchase and sale documents as negotiated by the
parties. It should include reasonable and balanced protections for both parties. Experience and reputa-
tion are important criteria when selecting an attorney. The attorney chosen should have experience han-
dling similar transactions. It may make sense to choose one attorney
to represent both buyer and seller. This avoids the adversarial relationship that opposing attorneys often
adopt and improves the odds of successfully completing the transaction. It also eliminates some of the
emotion in the negotiation process, improves the lines of communication between the parties, expedites
completion of the deal and is less expensive.