The basic concept of business value is that the future benefits (returns) of owning a company must be adjusted (discounted) for the risks associated with owning the company. The sales or earnings of a company are typically used to represent the benefits (returns). Multiples and rates are used to represent the risks. The basic formula of business value is - Value = Returns/Risks. This article will address how to quantify the returns of a business.

Earning Capacity
There are many benefits to owning a business (financial and non-financial). Non-financial benefits like: being your own boss, controlling your own destiny, prestige, etc. are impossible to quantify, so valuation focuses on the financial rewards. The returns from a company are generally measured by its ability to generate earnings (earning capacity). The value of a company that does not have earning capacity comes primarily from its tangible assets.

Earning capacity is not just the net profits from financial statements and tax returns. Net profits must be adjusted to compensate for accounting principles, tax regulations, and related party dealings that do not accurately portray what really happened. Cash flow is considered a purer form of earnings because it is not affected by accounting principles and tax regulations. For these reasons cash flow is the preferred measure of earning capacity for valuation purposes.

The earnings of a small, owner-operated company must do two things. First it must provide adequate compensation to the owner for the services he or she renders to the company. Any remaining cash flow or earnings represent the earning capacity of the company.

Many small businesses don’t earn enough to provide the owner with adequate compensation. Some of these companies have existed for decades, have established customer bases, and have excellent reputations.

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A valuation is based on a hypothetical sale of the company, so two critical issues need to be well defined from the beginning – 1) exactly what is being sold (valued), and 2) who is the most likely buyer.

What is Being Valued?
Businesses are generally sold in two types of transactions – asset or stock sales. A stock sale involves selling the shares of the stock of a company that operates as a corporation. Most buyers are not interested in a stock sale because it involves acquiring liabilities – existing, contingent and potential. An asset sale gives the buyer a clean start. Therefore, stock sales of small businesses are not common. Many valuation methods produce results based on stock sales, so the results must be adjusted accordingly.

Asset sales involve selling the main operating assets of the company. That typically includes inventory; furniture, fixture and equipment (FF&E); leasehold improvements: and all intangible assets, commonly referred to as goodwill. The intangible assets include items like: customer list, trade name, telephone numbers, assembled workforce, etc. These assets are typically sold free and clear of all liabilities. Cash, trade receivables and payables, and miscellaneous assets or liabilities are commonly excluded from the sale. If the owner also owns the company real estate, it may or may not be included in the sale. The sale will also include the assignment of existing leases or contracts, or will be contingent on the buyer obtaining new ones. If the company operates under a franchise agreement or needs a specific type of permit or license like a liquor license, the sale will include the transfer of these items.

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As a business owner, you know more about your business than any one, but there is one thing you are not too sure about - how much it is worth. This is the first in a series of articles designed to help you learn about business valuation and, if you choose, do your own business valuation.

Defining Value
Before we begin discussing business valuation it is important to define what value is. When asked, most people will struggle to define it then end up using an example like a one dollar bill is worth more than a quarter. Value is difficult to define without comparing at least two items. The comparisons must be well defined to have any meaning. For example a rare quarter may be worth more than a common dollar bill. The first step in any valuation is to accurately and completely define the property that is being valued.

Value is also subjective.  Someone who needs a quarter to plug a parking meter in order to avoid a parking ticket would gladly pay a dollar or more for a quarter. Similarly, one business may have a number of values. A strategic buyer that can plug the customers of the business into its existing system may perceive more value than a person who is going to run the business day-to-day. The second step in valuation is defining for whom the property is being valued.

What is a Business Valuation?
A business valuation is simply an estimate of what a business is worth based its hypothetical sale. It may also be called a business appraisal and has some similarities with real estate appraisals.  A big difference is that much of business value is in the form of intangible assets, or goodwill. Valuing intangible assets involves a process of using various accepted valuation approaches and methods. The goal is to determine a value that can be explained and justified to others.

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Buy Business Today - Profit When?
There’s an old saying that states, “Free advice is worth [only] what you pay for it.”  While this is true in many situations in life, how does this homily apply to buying a business?  After all, anyone who wants to buy a business will need some serious advice on the matter.  They will want answers to such questions as, “What kind of business should I buy?” and “What’s the advantage of a franchise over an existing business?” and “How do I know it’s a good price?” and so many more.  Additional concerns arise once the reality of buying a business starts to sink in.  Then buyers will want to know, “How much money do I need to operate the business properly?” and “When will I start to show a profit?”  The novice may not even know which questions to ask, not to mention having a clue about the answers.  In this situation, free advice is both available and worthwhile.  Even the cost of paying for such advice is nominal.

Advice on Buying a Business
So do you settle for free advice, or pay someone for it?  In either instance, where do you turn to learn more about buying a business?  There are a number of resources available to prospective business owners.  You simply have to know where to look.  Here are some places to start:

• Entrepreneur Forums at GlobalBX.com - Our business forum is for entrepreneurs and small business owners.

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Is Owning a Business in Your Future?
At one time or another, nearly every employee dreams of owning a business.  Perhaps you’re tired of all your hard work ending up helping someone else achieve his or her entrepreneurial success, or you may fear for losing your job in a weakened economy.  Whatever your motivation, the compulsion to own a business is strong in many of us.  But the risk involved in turning that dream into reality has, all too often, acted to derail even the best-laid plans.

How to Own a Business
Every prospective business owner is forced to wrestle with many different kinds of questions.  Concerns about money certainly lead the pack, but knowing what kind of business best suits you is even more important.  The best place to start is by examining the reasons why you want to own a small business.  Here are some benefits to ponder:

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Cashing In on a Business Start Up
More people than ever are deciding to start their own businesses, so why should you be any different?  Whether you choose to acquire an existing company, start one from scratch, or purchase a franchise, there are a number of costs associated with buying a business.  Knowing what they are and calculating in advance how much you’ll need for each item will save you tons of time, headaches, and even money down the road.

Primary Business Start Up Costs
Different small business start-ups will have all sorts of different start up costs.  For example, retail businesses need storefront locations and the people to run them during business hours.  Work from home businesses need none of that, but you will instead incur costs to remodel and stock the spot in your home from which business will be conducted - as well as investing in a secure lock to keep out the kids while you’re trying to close a big sale.  The business cost start up variables you will most likely encounter - no matter what kind of business you choose to own - include the following:

• Fees to professionals - Any owner of a new business requires the services of an attorney to draw up articles of incorporation or other company-forming materials, plus an accountant to keep the books straight and the I.R.S.

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Start a Small Business
Owning their own business is a dream many Americans share, and learning how to start a business is not that difficult.  There are certain steps that must be taken for legal and financial purposes, and other aspects that need to be addressed to ensure that you will be successful.  The following start business checklist should serve as a rough guideline; your specific needs may vary depending upon the type of business you plan to operate.

How to Start a Small Business

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The American Recovery and Reinvestment Act of 2009 …
… Is the official name of what is known among the general population as Obama’s Stimulus Package, occasionally called “The Stim” by various news talking heads - the ones who are clever, that is.  An Obama Small Business plan does not appear to be in the works, but even critics acknowledge that the Obama Stimulus Plan contains a number of “good news” elements for small business owners, especially in certain sectors.  The entire package totals $787 billion, and this amount is arrived at by combining the value of tax cuts, direct cash infusions, and loan guarantees over and above those that already exist.

Barack Obama’s Stimulus Package - Obama For Small Business
In numerous stump speeches during the 2008 election process, Barack Obama consistently came out in favor of locally owned businesses.  That concern has carried over to his presidency.  Here are some elements of the Obama Stimulus that directly benefit small businesses:

• Larger loan guarantees - The U.S.

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