Released on: March 28, 2008, 1:20 am

Press Release Author: For More Free Resources visit www.oversightsystem.com

Industry: Management

Press Release Summary:
In the business broker community there is a review process that helps a buyer
determine if a business purchase makes sense or not. This check can be done by a
Fortune 500 company where everything is figured down to the penny and takes 1000
hours of research or it can be done by a small main street shop buyer who figures it
out in 1 hour. Each item in this review process requires a decision. This decision
can be based on extensive research or just on a reasonable guess.

Press Release Body: In the business broker community there is a review process that
helps a buyer determine if a business purchase makes sense or not. This check can be
done by a Fortune 500 company where everything is figured down to the penny and
takes 1000 hours of research or it can be done by a small main street shop buyer who
figures it out in 1 hour. Each item in this review process requires a decision. This
decision can be based on extensive research or just on a reasonable guess.

The beauty of this process is; how long you want to spend on doing this activity is
totally up to you. As we review this process, I will explain the variables of this
system so you can make the necessary decisions where needed. Remember, this is only
a tool to help you make decisions about a business purchase; it is not a sure-fire
foolproof system. I will just lay it out for you and you make your own decision as
to the validity of this formula for analyzing a business purchase that you may want
to make.

The Sanity check requires two mathematical formulas, which require dollar amounts or
other numbers to be entered in each formula. The math is calculated and then the
results are compared against the purchase price. If it doesn't work out the way you
wanted, you have the option of then going back and change some of the numbers and do
the calculation a second time.

The two formulas are:

1. SP + WC - BF = CR
Sale Price + Working Capital - Borrowed Funds = Cash Requirement

2. SDE - FMW (FO) - DS - ROI = Extra Profit/Loss
Sellers Discretionary Earnings - Fair Market Wage (for the owner) - Debt Service -
Return on Investment (Cash Requirement x Interest rate -Stated as a Percentage) =
Extra Profit/Loss

Since each item in the formula needs to have a dollar amount determined, we will
define the terms and then discuss how the dollar amount is derived at.

Terms Definition:

Sale Price: The price that is being asked for the business or the price the buyer is
thinking of offering. Depending on when you do this analysis. If you are trying to
determine an asking price you would calculate all the other numbers in these two
formulas to determine what should be your offering price. We will do examples to
make this clear later in this article.

Working Capital: The short-term assets minus the short-term liabilities is the
accounting definition. The simple explanation would be the amount of money necessary
to be invested by the buyer to run the daily operations of the business, once
purchased. This would include monies tied up in inventory, and accounts receivables.
Money invested to pay the landlord's or utility company's deposits. Also included is
the money spent on the business purchase to cover the loan origination costs and
purchase escrow fees when buying the business. It is the total funds invested into
the business to keep it running. The down payment given to the seller is not part of
this number, since it is included as a separate item.

Calculation notes:
1. Cost of inventory: $_________________ (+)
2. Accounts receivable: $_________________ (+)
3. Landlord deposit: $_________________ (+)
4. Utility Deposits: $_________________ (+)
5. Escrow fees to purchase: $_________________ (+)
6. Loan origination costs: $_________________ (+)
7. Short term liabilities* $ _________________ (--)
Total Working Capital $_________________

* Short-term liabilities are defined as liabilities that are to be paid off within 1
year - accounts payables and the part of any notes payable that are to be paid
within 1 year.



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