What is
the difference in a valuation and an appraisal ?
A valuation is based on basic financial information and current market
conditions. An appraisal is much more detailed. Appraisals are
completed by independent licensed companies and cost more.
What do
bank require regarding valuations and appraisals ?
Most banks utilize SBA lending and are therefore bound by the SBA's Lending
requirements. As of May of 2009 the SBA requires banks to get an
independent appraisal of any business before lending. In fact, even if
you already have an appraisal done, the bank will usually do their own.
For specific SBA lending requirements, click on SBA
Lending.
Definition of
Cash Flow or Discretionary Cash Flow
Cash flow and Discretionary cash flow are usually used interchangeably.
In true accounting terms they are different because the Discretionary cash
flow considers the owner's perks and benefits. The intent of
discretionary cash flow is to allow buyers to compare one business to
another. It should represent how much cash is generated by the
business that the new owner will have to pay his salary and perks, pay loans
on the business (Debt Service) and continue to invest in the business
(Capital needs) in such items as equipment and facilities. For business
acquisition purposes, the discretionary cash flow is usually calculated as
follows: Net Income + Depreciation Expense + Interest Expense + Unusual or
One Time Expenses + Owner's perks and benefits.
Definition of Initial Capital Needs
This is the amount of money you will need (above and beyond the purchase
price) upon acquiring the business to operate. This is usually
specific to timing of cash flow items. For example, if you invoice a
customer they might pay in 30 to 45 days, but your vendors might require you
to pay in 10 days. Therefore, you need cash to pay vendors before you
get paid by your customers. Additionally, you need to continue to pay
employees no matter when the customers pay you. The current owner can
usually provide you with an estimate of your capital needs. If they
don't understand the term "Initial Capital Needs", just ask how much money
do I need to have in the bank to operate this business normally once I buy.
Definition of Annual Capital Needs
This is the amount of money that you need to invest annually to continue
operating the business. This is usually tied to the need to buy new
equipment, vehicles, computers or other items. The best source of this
is the seller. However, if the business has been operating for several
years, then the depreciation expense is normally a pretty good indicator of
annual capital needs.
Definition of Terms of Sale
For business acquisition purposes, terms of sale usually refers to payment
terms and conditions that must be met (i.e. Bank commitment to finance
specific amount).
Definition of Payment Terms
For business acquisition purposes, this defines how the buyer will be paid.
This can include cash at closing and seller financing. For seller
financing, it would be specific to the amount of seller financing, interest
rate paid and the term (months/years to repay.
We hope you find what your looking for in the list of questions
below.
If you have a question that is not answered below, just click on the "I have
a Question" button below and ask your question. We will get right back
to you with the answer.
