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How To Investigate Any Business Opportunity
What a Business Is Worth
It might seem that the price to be paid or received for a business would simply be equal to the value.
However, value refers to what a business is worth; price refers to the amount of money for which owner-
ship is transferred. There is usually a difference between price and value because the buyer and seller
differ as to how much the business is worth. The price will represent negotiation and compromise. Here
are two suggestions for fruitful negotiation :
·
Discussion between buyer and seller should focus on the future profit performance of the firm.
Since expected profit is basic to determining value, it can be a valuable point for negotiation.
·
Every profit projection includes some assumptions and risks. Generally, the less firmly based
the assumption and the more apparent the risk, the less value an expected profit can support.
Consequently, identifying and analyzing risks involved in future operations can make discus-
sions between buyer and seller more significant.
These two points will help bring negotiations about value toward a mutually acceptable price.
Financing The Acquisition
When the price has been settled, the question of how to finance it remains. Financing a buy-sell transac-
tion involves these five factors:
1. The amount of capital required.
2. The type of capital required.
3. The specific uses to which the capital will be put.
4. The length of time needed to pay back the capital source from the business operation.
5. The sources of available capital.
How much? Bill's failure after buying Sams Market illustrates a common problem - underestimating the
amount of capital required to purchase a business. Capital must be available not only to pay the pur-
chase price but also for
(1) Funds to operate until the business is generating cash,
(2) Funds to meet unexpected expanses, and