After reading this article you will be ready to apply your knowledge and fulfill your American dream of owning a business. This requires a serious effort on your part; However, if you are reading this article, I assume that you have decided to take this long journey and make a change in your life. I’m going to show you some easy ways to get the money you need through the modern wonder of leverage. We start with an approach that allows you to actually make the business pay for itself without having to reach for your wallet.
Question: Is it true that the method of extracting money from the company’s cash flow is reserved exclusively for finance gurus?
Answer: It is partly true. Most leverage techniques have this reputation. And frankly, they shouldn’t. If more people knew about it, many entrepreneurs would be in business by now. Such techniques seem to be reserved for financial professionals only, because they [the techniques] occur more frequently in strategic financial markets. You hear about many large acquisitions worth billions of dollars. However, you will never know how it happened or what has to do with it. This information will never be published. As mentioned in Strategy 4, building a strong network with business leaders will definitely give you access to this valuable information, even though you may not work in this field.
These are indeed hidden secrets that I am about to reveal to you. The power of information will allow you to go far. However, it is up to you to take the trouble to look for more information about the company you are considering acquiring. Remember that the most powerful tool you have when dealing with the seller is to show them your knowledge of the industry and how it’s beneficial to them (and yourself, of course). may be to sell you the business. And believe me, you too can start using these powerful yet simple tools right away.
Question: What’s the easiest way to explain how to use a company’s cash flow for financing purposes?
Answer: Let me start by giving you an overview of how much money we are really talking about. One expert explains it this way:
“The amount of cash that the average business puts in their treasury in just two or three weeks is usually enough to cover the down payment on that business’s purchase.”
Think about it. The money raised within a few days is usually enough to, with a little creativity, pay off the seller’s down payment. This can work no matter what type of business you are pursuing. Since there’s no law saying you can’t “borrow” that money, all you have to do is figure out how to use the money raised to pay the company once you’ve acquired it. This is easy when you have a CPA to calculate your cash flow to know how to approach the seller with your offer.
Question: How does the process work?
Answer: There are a few steps required. You or your CPA must determine the net cash flow generated in the first few weeks of business by finding the difference between the totals of cash receipts and operating expenses.
Question: What are the right ways to evaluate a company and what should I prioritize when making my decision?
Answer: There are different methods to evaluate companies. Typically, cash flow, assets or replacement values or a combination of these are taken into account when determining enterprise value. Various valuation methods typically used by valuation firms are listed below.
Replacement cost analysis:
o In general, the value of a company does not refer to the replacement value of the company’s assets. Sometimes the replacement cost of property, plant and equipment (PP&E) is far greater than the market value of the operations. Sometimes the value of goodwill, such as customer relationships, company logo and technical know-how, is far higher than the replacement value of the PP&E.
You can often choose a particular industry by expanding existing facilities, investing in entirely new facilities, or acquiring 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 costs involved. Of course, an investor will often consider capacity utilization, location, environment, political and legal issues, among other things, when determining where and how to invest. These issues may outweigh the importance of replacement cost analysis; in such cases, that valuation technique is not used to determine the fair value of the entity.
Asset Valuation Analysis:
o It is generally possible to liquidate a company’s PP&E assets and, after the company’s liabilities have been paid off, the net proceeds would accrue to the company’s equity. It must be determined whether such a liquidation analysis should be conducted assuming a quick or an orderly liquidation of the assets. But even under the assumption of an orderly liquidation of a company, an operating company is usually much more valuable. In this case, the application of the asset appraisal approach is not appropriate, since the company operates successfully; In these circumstances, the fair market value of the company in the industry in which the company operates will almost certainly exceed the value of its assets on a liquidated basis. The sum is more valuable than the parts. It is appropriate to measure non-operating assets using an asset approach to determine their value as part of the entity’s fair value.
Discounted cash flow analysis.
o Another determinant of enterprise value is expected cash flow. Discounted cash flow analysis is a valuation technique that isolates the company’s projected cash flow available to service debt and generate a return on equity; The present value of this free cash flow to capital is calculated over a forecast period based on the perceived risk of generating such cash flow. In order to account for the time value of capital, it is usually appropriate to value the company’s cash flows using a discounted cash flow approach.
Total invested capital.
o Any method of valuing a company or its businesses values the total invested capital. These different values are compared to determine a final market value. It is often appropriate to weight the various implied values for total capital invested based on the relative effectiveness of each valuation method used for the analysis. Once the value of the total invested capital has been determined, any entitlement to that value that overrides the common stock will be deducted to determine the fair market value of the common stock. These other claims include the fair value of all debt, outstanding preferred stock, outstanding stock options and stock appreciation rights. Non-operating assets not previously valued must be accounted for and added to total invested capital. This generally includes cash and the fair value of non-operating assets.
o An owner can expect cash to flow into capital over an indefinite period of time. While valuation models often use forecasts of future cash flows, there may be a need to represent the value of cash flows that can reasonably be expected to exceed the forecast horizon. This value, called the terminal value, is often calculated by multiplying the fifth year’s cash flow by a multiple. Selected multiples typically use the median of the total capital invested to peers selected in the peer-to-peer public company analysis. The selected multiple may be discounted to reflect the company’s performance or size characteristics compared to comparable companies. This is very similar to dividing the cash flow by the weighted average cost of capital and including a growth factor.
Question: Well, that’s all great. However, how does this help me when buying the company?
Answer: You negotiate a deal that allows the seller to receive the down payment directly from cash flow once you take over the business. If that sounds too good to be true, here’s an example of its feasibility:
Sandy and Kevin, an aspiring young entrepreneur couple, wanted to buy a thriving restaurant and cake shop in Northern Virginia. Although they were smart, energetic, and had some experience in the food industry, they fell far short of the ability to pay the $100,000 the seller was asking for on the $500,000 total price. (The restaurant’s annual sales totaled $1 million, some of which came from a thriving commercial business that sold its freshly roasted coffee to local gourmet supermarkets and coffee shops.)
Fortunately, the seller agreed to step in and fund the $400,000 difference over five years at 10% interest. This often happens, especially with a lot of persuasion. The couple’s problem, however, was raising the remaining $100,000. Strongly believing in the skills and determination of their son and daughter-in-law, Kevin’s parents decided to loan them $20,000 to repay as they wished. That certainly helped, but they still needed $80,000. To achieve this goal, the couple’s CPA prepared a cash flow statement for the first month of their clients’ new ownership. Their suppliers wouldn’t ask for payment for a month, so Sandy and Kevin wouldn’t have that expense. However, operating costs such as rent, wages and ancillary costs had to be taken into account.
When Sandy and Kevin saw the numbers from the financial analysis, they were confident that they could easily make $80,000 out of their business in four weeks. But the big question was, how did they convince the seller (who was expecting a $100,000 check upon closing) to wait three to four weeks for his money?
Creativity, persuasiveness and seriousness were required here. Working with attorneys and their CPA, Sandy and Kevin devised a plan that allowed the seller to withhold final sales documentation for four weeks. During that time, they paid the seller about $20,000 a week. If they missed a payment, the seller would have the right to cancel the deal. The seller agreed to this offer and gave Sandy and Kevin their American Dream with no cash of their own.
This example represents over 80% of all takeovers and acquisitions. In the worst case, the seller may not cooperate; In that case, you should understand that he’s probably never been seriously interested in selling his business. It’s possible the seller was waiting to see how far you would go during the negotiation process, which brings us to the next question.