Agenda - Council - 08/24/1982 - Laserfiche WebLink

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I USA I :1 I ! 82-31 Management' July 30, 1982 I I I I I I ! I I I I I I AN OBJECTIVE APPROACH TO SELLING OR BUYING A SMALL BUSINESS The July-August issue of the Harvard Business Review includes an article by James Howard in which he discusses a 7-step method that buyers and sellers can adopt for placinga dollar value on the earn- ing power of a business. Some highlights: Buying or selling a small business is never easy. More often than not, both buyer and seller are more concerned with being taken advantage of than with .finding a common ground. Instead of focus- ing on a dollar amount of an acquisition, they must concentrate on developing a mutually benefi- cial package. Both parties need to understand each other's assumptions, definitions of company profits, and considerations of other factors in valuing assets. This approach entails buyers and sellers arriving at the preliminary understandings necessary to: · Develop a realistic financial statement--estab'lish the profitability of the busi- ness as of the proposed acquisition date. · Appraise tangible assets like land, building, and equipment as to liquidation and going-concern value. · Calculate the annual cost of ownership of the tangible assets, based on a mar- ket-determined substitute investment return, using clear-cut guidelines. · Allocate the indicated earnings of the business to reflect varying levels of risk in the different types of assets being acquired. · Develop a precise and realistic price-earnings multiple to reflect a variety of considerations (e.g., risk and desirability of the business), if the earning power is sufficient to justify payment of goodwill. · Prepare all valuations to determine selling price on the basis of an asset sale, unless both parties desire a stock sale. The Seven Steps Develop a Stabilized Income Account. This shows the earning power of the business for one or more years into the future. The stabilized income account eliminates the effects of the seller's