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Ask Jane Applegate
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January 10, 2000: 2:48 p.m. ET
Figuring the value of a firm and buyer's 'sweat equity'; finding start-up funding
By Jane Applegate
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NEW YORK (CNNfn) - Here are answers to your questions for CNNfn small-business columnist Jane Applegate:
Dear Jane: I am the vice president of a small business with 12 employees and annual sales of $3 million. The president and sole owner is 72 years old and wants to retire. He is willing to sell me the business and finance it. My payments would provide him with a good source of retirement income.
My questions are these:
1. What steps should I take before entering into this transaction?
2. How is the value of a business determined?
3. How would we determine the value of my "sweat equity," which is 10 years of work and many sleepless nights?
I want to purchase the business because the potential for growth is phenomenal.
Sounds like you have a great opportunity to own and operate a business that you know very well. Your challenge is coming up with a selling price and financing package that works well for both of you. To do this, you’ll need to hire outside advisers.
The only way to come up with a fair valuation is to hire a business broker or appraiser who is familiar with your industry. The fee you’ll pay for their time and a written report will be money well spent.
While they are appraising the business in terms of real estate, assets and revenues, you and your accountant should be taking a close look at all financial records, including long- and short-term debts and overhead expenses.
You’ll also need to know how much it costs to run the company including rent, insurance (for employees and equipment), and a detailed breakdown of the payroll taxes and cost of benefits. These numbers are critical because you want to make sure the business is generating enough cash to pay all the bills and still turn a profit.
Be sure to hire an experienced accountant to sort through the tax issues affecting you and the seller. You want to structure a payment schedule that works for both you and the seller, especially since he is counting on a steady income stream. The toughest question is how to value on your sweat equity. This really depends on how the owner values your contribution and hard work in the past 10 years. You’ll just have to wait and see what he comes up with.
Dear Jane: My husband and I want to start a business but are having a problem with start-up funding. Where and how do we go about finding it? How do some people manage when it seems as if they have nothing? Where does this magical money come from?
Unfortunately, there is no magic to it. Despite billions of dollars invested by venture capitalists last year, most small companies are funded with credit cards or family savings. There is no "free money” out there, despite books claiming to tell you where to find it. Micro-loans are available through a variety of community and economic development groups, but you still have to apply for a loan and go through a credit check.
If you own a home, you could apply for a home equity line to start your business. It may cost less than using high-interest credit cards.
Before you borrow any money, make sure you have a clear vision and a concise marketing plan. I would recommend getting some free counseling from a local Service Corps of Retired Executives (SCORE) member. You can locate a counselor and even obtain online help by visiting www.SCORE.org.
The U.S. Small Business Administration also has a variety of free and low-cost educational seminars across the country. Visit www.sba.gov for all the details.
Finally, MasterCard publishes an excellent, free 124-page small business financing booklet with state-by-state information and resources. You can obtain a copy by visiting my site, www.applegateway.com or sending a post card with your name and full mailing address to: Box 768, Pelham, NY 10803.
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