Step-By-Step Example Of The Stock Valuation Technique Using Numbers Buying a Business With Its Own Cash – And Not a Penny of Your Own

You are searching about Step-By-Step Example Of The Stock Valuation Technique Using Numbers, today we will share with you article about Step-By-Step Example Of The Stock Valuation Technique Using Numbers was compiled and edited by our team from many sources on the internet. Hope this article on the topic Step-By-Step Example Of The Stock Valuation Technique Using Numbers is useful to you.

Buying a Business With Its Own Cash – And Not a Penny of Your Own

After reading this article, you will be ready to start applying your knowledge and reach your American Dream of owning a business. This comes with a serious effort on your part; however, by reading this article, I assume you’ve decided to take this long journey and start making a change in your life. I’m going to introduce you to some easy ways to get the money you need through the modern-day miracle of leverage. We’ll start with an approach that enables you to make the business actually pay for itself without requiring you to reach for your wallet.

Question: Is it true that the method of taking money out of the company’s cash flow is reserved exclusively for financial gurus?

Answer: It is partly true. Most leveraging techniques have that reputation. And frankly, they shouldn’t. If more people knew about them, many entrepreneurs would have been in business long ago. Such techniques only seem to be reserved for financial experts because they [the techniques] appear more frequently in strategic financial markets. You hear of many major acquisitions worth billions of dollars. Yet, you will never hear how it happened or what was involved. This information never goes public. As will be mentioned in Strategy 4, by developing a strong network with corporate leaders, you will definitely have access to that valuable information even though you might not work in the field.

These are actually hidden secrets that I’m revealing to you right now. The power of information will allow you to go far. However, it’s up to you to make the effort in searching for more information about the company that you want to acquire. Remember, the most powerful tool you have while you are dealing with the seller is showing him your knowledge in the industry and how it can be beneficial for him (and yourself, of course) to sell you the business. And, believe me, you too can put these powerful, yet simple, tools to use immediately.

Question: What is the easiest way to explain how to use a business’s cash flow for financing purposes?

Answer: Let me start by giving you some perspective on how much money we’re really talking about. One expert explains it this way:

“The amount of cash an average business puts into its cash register over just two or three weeks is usually enough to cover the down payment to buy that business”.

Think about it. The cash that collects in just a matter of days is usually enough so that, with some creativity, you can use it to satisfy the seller’s down payment. That can work no matter what type of business you are pursuing. Since there is no law that says you can’t “borrow” that money, all you have to do is figure out how to use the cash collected to pay for the business once you have acquired it. This easy if you have a C.P.A to calculate your cash flow in order to know how to approach the seller with your proposal.

Question: How does the process work?

Answer: A few steps are required. You, or your C.P.A, must determine the net cash flow generated over the first several weeks of business by determining the difference between cash receipt totals and operating expenses.

Question: What are the proper procedures to evaluate a business, and what should I prioritize to make my decision?

Answer: There are several methods used to evaluate companies. Typically cash flow, assets, or replacement values, or a combination of these, are considered when determining the value of a company. The following lists various valuation methodologies typically used by valuation firms.

Replacement Cost Analysis:

o Generally, the value of a company does not relate to the value of replacing the assets of the company. Sometimes the replacement value of the property, plant, and equipment (PP&E) is far higher than the fair market value of the operating business. Sometimes the value of goodwill, such as customer relations, corporate logo, and technical expertise are far higher than the replacement value of the PP&E.

You can often choose a particular industry by expanding facilities already owned, investing in entirely new facilities, or by purchasing all or part of a new company operating in the industry. The decision as to which investment to make depends, in part, on the relative cost of each. Of course, an investor will often consider capacity utilization, location, environmental, political, and legal issues among other things in determining where and how to invest. These issues may outweigh the importance of the replacement cost analysis; in such cases, this valuation method is not used to determine the fair market value of the company.

Asset Appraisal Analysis:

o It is generally possible to liquidate the PP&E assets of a company, and after paying off the company’s liabilities the net proceeds would accrue to the equity of the company. It is necessary to determine whether such liquidation analysis should be performed assuming rapid or orderly liquidation of the assets. However, even when assuming an orderly liquidation of a company, it is generally the case that an operating company will be of substantially higher value. It is not appropriate to use the asset appraisal approach in this case because the company is operating successfully; under such circumstances, in the industry in which the company operates, the company’s fair market value will almost certainly be in excess of the value of its assets on a liquidated basis. The sum is more valuable than the parts. It is appropriate to appraise non-operating assets using an asset appraisal approach to determine their value as part of the fair market value of the company.

Discounted Cash Flow Analysis.

o Another determinant in a company’s value is the anticipated cash flow. Discounted cash flow analysis is a valuation method that isolates the company’s projected cash flow that is available to service debt and provide a return to equity; the net present value of this free cash flow to capital is computed over a projected period based on the perceived risk of achieving such cash flow. So as to take into account the time value of capital it is typically appropriate to value the company’s cash flows using a discounted cash flow approach.

Total Invested Capital.

o Each method of valuing a company or its business units places a value on the total invested capital. These various values are compared to reach a definitive fair market value. Often it is appropriate to weight the various implied values for total invested capital based on the relative effectiveness of each valuation method used for the analysis. When the value of the total invested capital has been determined, any claims to that value that have a more senior right than common stock are subtracted to determine the fair market value of common stock. These other claims include the fair market value of all debt, outstanding preferred stock, outstanding stock options, and share appreciation rights. Non-operating assets that had not been previously valued must be accounted for and added to total invested capital. These generally include cash and the fair market value of any non-operating assets.

Terminal Value.

o An owner may expect cash to flow to capital over an indefinite period of time. While valuation models often use predictions of future cash flows, it may be necessary to represent the value of the cash flow that can reasonably be expected to extend beyond the horizon of the projections. This value, known as the terminal value, is often calculated by multiplying the fifth year cash flow by a multiple. Selected multiples commonly use the median multiple of total invested capital to comparable companies selected in the comparable public company analysis. The selected multiple may be discounted to reflect the company’s performance or size characteristics relative to comparable companies. This is quite similar to dividing the cash flow by the weighted average cost of capital and including a growth factor.

Question: Well, that is all great. However, how will that help me in the purchase of the business?

Answer: You negotiate a deal that enables the seller to receive the down payment directly out of the cash flow once you’ve taken over the company. If this sounds too good to be true, here is an example of its viability:

An aspiring young entrepreneurial couple, Sandy and Kevin, wanted to buy a thriving restaurant and pastry shop in Northern Virginia. Although they were bright and energetic, and possessed some experience in the food industry, they nevertheless lacked-by a long shot-the ability to pay the $100,000 the seller wanted down on the total price of $500,000. (The restaurant’s annual sales equaled $1 million, some of which came from a thriving commercial business selling its fresh roasted coffee to local gourmet supermarkets and coffee shops.)

Fortunately, the seller agreed to pitch in and finance the $400,000 difference over five years at 10% interest. This happens often, especially with a good deal of persuasion. The couple’s problem, however, was raising the remaining $100,000. Kevin’s parents believed strongly in their son and daughter-in-law’s skills and determination and decided to loan them $20,000 to be paid back at their convenience. That certainly helped, but they still needed $80,000. In order to reach this goal, the couple’s C.P.A developed a cash flow statement for the first month of his clients’ new ownership. Their suppliers wouldn’t require any payment for a month so Sandy and Kevin would not have that expenditure. However operating expenses such as rent, payroll, and utilities had to be considered.

Upon seeing the numbers from the financial analysis, Sandy and Kevin were convinced they could easily draw $80,000 from their business within four weeks. But the big question was: How could they convince the seller (who expected a $100,000 check on closing) to wait three to four weeks for his money?

This is where creativity, persuasion, and earnestness were required. Strategizing with lawyers and their C.P.A, Sandy and Kevin devised a plan that enabled the seller to withhold the final papers of the sale for four weeks. During that period, they would pay the seller approximately $20,000 a week. If they missed a payment, the seller would have the right to renege on the deal. The seller agreed to this proposition giving Sandy and Kevin their American Dream for no cash of their own.

This example represents over 80% of all take-over and acquisitions. In the worst-case scenario, the seller may not cooperate; in this case you should understand that he probably was never seriously interested in selling his business. It is possible that the seller was waiting to see how far you would go during the negotiating process, which brings us to the next question.

Video about Step-By-Step Example Of The Stock Valuation Technique Using Numbers

You can see more content about Step-By-Step Example Of The Stock Valuation Technique Using Numbers on our youtube channel: Click Here

Question about Step-By-Step Example Of The Stock Valuation Technique Using Numbers

If you have any questions about Step-By-Step Example Of The Stock Valuation Technique Using Numbers, please let us know, all your questions or suggestions will help us improve in the following articles!

The article Step-By-Step Example Of The Stock Valuation Technique Using Numbers was compiled by me and my team from many sources. If you find the article Step-By-Step Example Of The Stock Valuation Technique Using Numbers helpful to you, please support the team Like or Share!

Rate Articles Step-By-Step Example Of The Stock Valuation Technique Using Numbers

Rate: 4-5 stars
Ratings: 7801
Views: 64912739

Search keywords Step-By-Step Example Of The Stock Valuation Technique Using Numbers

Step-By-Step Example Of The Stock Valuation Technique Using Numbers
way Step-By-Step Example Of The Stock Valuation Technique Using Numbers
tutorial Step-By-Step Example Of The Stock Valuation Technique Using Numbers
Step-By-Step Example Of The Stock Valuation Technique Using Numbers free
#Buying #Business #Cash #Penny

Source: https://ezinearticles.com/?Buying-a-Business-With-Its-Own-Cash—And-Not-a-Penny-of-Your-Own&id=1479274

Related Posts

default-image-feature

Small-Cap Stocks Are Expected To Out-Perform Large-Cap Stocks Sales Force Optimization – "Sales Team Compensation"

You are searching about Small-Cap Stocks Are Expected To Out-Perform Large-Cap Stocks, today we will share with you article about Small-Cap Stocks Are Expected To Out-Perform Large-Cap…

default-image-feature

Should You Sell Stock Funds That Are Up Oilr.Bond Funds How to Read the Financial Pages

You are searching about Should You Sell Stock Funds That Are Up Oilr.Bond Funds, today we will share with you article about Should You Sell Stock Funds…

default-image-feature

Should I Report A Stock That I Reinvested Site Irs.Gov Dare to Invest For Your Future

You are searching about Should I Report A Stock That I Reinvested Site Irs.Gov, today we will share with you article about Should I Report A Stock…

default-image-feature

Should I Purchase My Stock Options Short-Term Gains Long-Term Trading Binary Options As a Full Time Business

You are searching about Should I Purchase My Stock Options Short-Term Gains Long-Term, today we will share with you article about Should I Purchase My Stock Options…

default-image-feature

Roth Ira Ira Non-Retirement Stocks Bonds Where To Invest What Investment Basics & Financial Planning

You are searching about Roth Ira Ira Non-Retirement Stocks Bonds Where To Invest What, today we will share with you article about Roth Ira Ira Non-Retirement Stocks…

default-image-feature

Risk-Free Asset Is One Minus The Weight Of The Stock Safer Sex Menu

You are searching about Risk-Free Asset Is One Minus The Weight Of The Stock, today we will share with you article about Risk-Free Asset Is One Minus…