If you are buying or selling a business,
here are some reasons to have a CPA assist you.
A CPA stands for Certified Public Accountant. The term
certified refers to the licensing to carry on business
as a CPA and meeting the standards as promulgated by
the American Institute of CPAs and the various state
societies. CPA's have more experience working with other
professionals such as attorneys, business brokers, bank
officers, and insurance agents than non-CPA's. Most
CPA's have experience with Business Valuations and Financial
Statements analysis including evaluating and verifying
asset and liability amounts, financial projections and
small business operations.
When buying or selling a business the company's Financial
Statements (balance sheet, Income statement, cash flow
statement), tax returns, sales tax reports, customer
lists should be prepared or evaluated by a CPA. Past
years Financial Statements should be provided for important
comparative analysis. After digesting the financial
statements and tax returns, the important questions
that should be answered are: Is the business worth it?
And how was the price established?
Valuing a business is a tricky process with the goal
being to ascertain the Fair Market Value. Fair market
value is the amount at which the property would change
hands between the seller and buyer when neither is under
compulsion to buy and when both have reasonable knowledge
of relevant facts concerning the business.
There are several methods used by CPA's to value a business.
Generally, the type of business it is, will determine
the method or methods used for the valuation. Some methods
used by CPA's are the asset method, income method, comparable
or guideline company method, discounted future earnings
method and Ratio analysis.
The basis for the sale price will most likely be based
on the history of the business. Within the Financial
Statements, the Balance Sheet will show you the cost
of the tangible assets that the business owns such as
buildings, auto and or trucks, equipment and furniture.
The historical cost of these tangible assets less accumulated
depreciation will be the resultant net book value of
the tangible assets owned by the business. The difference
between the sales price and the tangible assets would
be considered goodwill for the buyer. The current value
of the tangible assets most likely will have nothing
to do with their original cost or their net book value.
A CPA can give you this important balance sheet comparative
analysis. The Income Statement and Cash Flow statement
need to be prepared or reviewed by a CPA. The Income
Statement will illustrate the gross income sources as
well as the operating and non-operating expenses, and
the resulting profit or loss for the period. The CPA
will perform ratio analysis on these amounts and give
you valuable feedback on the operations. The Cash Flow
Statement analysis is important and will reveal whether
or not the cash generated by the business is enough
to pay the principle and interest on the financing required
to buy the business.
The CPA can also help structure the deal, suggesting
the structure with the best tax ramifications for his
or her client. Some variables that may be negotiated
to complete a deal are; the amount of the down payment,
the interest on a note taken back, the time the seller
is willing to carry the note, all cash verses cash and
note deal (installment sale), the possibility of a consulting
contract for the seller as part of the purchase price.
After buying a business, a CPA can explain to you the
pros and cons of selecting a specific type of new entity.
You may elect to become a C or S Corporation, Limited
Liability Company, Partnership, Sole Proprietorship
etc.
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