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© Copyright 2002-2003. All rights reserved.
Page 12
How To Investigate Any Business Opportunity
tors: 
·
   
Recent profit history. 
·
   
General condition of the company (such as condition of facilities, completeness and accuracy of
books and records, morale and so on). 
·
   
Market demand for the particular type of business. 
·
   
Economic conditions (especially cost and availability of capital and any economic factors that
directly affect the business). 
·
   
Ability to transfer goodwill or other intangible values to a new owner. 
·
   
Future profit potential. 
The six factors named above determine the fair market value. However, businesses rarely change
hands at fair market value. The reason is that three other factors often come into play in arriving at an
agreed upon price. Pratt identifies them as follows: 
·
   
Special circumstances of the particular buyer and seller. 
·
   
Tradeoff between cash and terms. 
·
   
Relative tax consequences for the buyer and seller, which depend on how the transaction is
structured. 
The definition of fair market value is the price at which property would change hands between a willing
buyer and a willing seller, both being adequately informed of all material facts and neither being com-
pelled to buy or to sell. In the market place, buyer and seller are nearly always acting under different lev-
els of compulsion.
Rule-of-Thumb Formulas
The rule for using rule-of-thumb formulas for pricing a business is don't use them. The problem with rule-
of thumb formulas is that they address few of the factors that impact a business's value. They rely on a
"one size fits all" approach when, in fact, no two businesses are identical.
Rule-of-thumb formulas do, however, provide a quick means of establishing whether a price for a certain
business is "in the ballpark." Formulas exist for many businesses. They are normally calculated as a per-
centage of either sales or asset values, or a combination of both.
Comparables
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