What is Gross Margin? A company’s gross margin represents the percentage of gross profit divided by total revenue. Gross profit is total revenue minus the Cost of Goods Sold (COGS) where COGS is the labor and material costs in producing goods or services. Thus, a business with $1M in sales and $600K of COGS will … Read more
What Is A Break Up Fee? A break up or termination fee is a contractual penalty imposed on one party of a business deal for failing to close on the transaction. Break up fees are very rare in small business sales. Constructing and negotiating the terms of a break up fee involves hefty legal costs … Read more
Retaining Customer Base Critical to Valuation The retention of the customer base by the buyer after purchasing a business is perhaps the most important component of many business deals. Since the valuation of virtually all businesses is predicated upon its future cash flow, the buyer must be assured that the future cash flow – and … Read more
Customer Deposits: Unearned Revenue When selling a business with a significant amount of customers who pre-pay a deposit prior to receiving goods or services, it is imperative to accurately define and fairly allocate the customer deposits at closing. Customer deposits are considered a current liability or unearned revenue (held in cash on the balance sheet), … Read more
Buying A Franchise A franchise is a business model where a franchisor grants a franchisee the right to use its trademark, brand, and operational systems within a prescribed territory for a set period of time (usually ten year terms). In exchange, the franchisee must follow the franchisor’s reporting obligations, business plan, and payment requirements including … Read more
What is A Circle of Competence? Famed investors Warren Buffett and Charlie Munger long ago popularized the mental model of staying within one’s circle of competence as an investment strategy. Staying within one’s circle of competence refers to investing only within areas where one has earned knowledge, skills, and expertise while avoiding investing in areas … Read more
Staff Retention Critical After Closing A key component of a company’s intangible assets or goodwill is its employment relationships with its employees and independent contractors. For many businesses – especially in service-related industries – having a trained group of staff members is essential to acquiring customers, keeping customers, and ultimately generating profits. When it comes … Read more
Red Flags A Warning Sign Potential buyers of businesses often look for red flags, or warning signs concerning the characteristics of a given business for sale. While virtually every business has negative traits, a red flag indicates a significant and unusual risk that a business may not perform up to the buyer’s expectations after the … Read more
Credibility Key When Selling Businesses In order to establish credibility when selling a business, the business owner – and by extension their business broker – must be trusted and believed by the buyer. By becoming a believable and credible source of information, it is also possible for a business broker to convince a buyer that … Read more
Debt Assumption in Business Sales Corporate debt is borrowed money on a long term basis that is used to serve a financial need that can not otherwise be met. This differs from a company’s accounts payable (A/P) which represents short term liabilities owed by a company for products or services purchased on credit. Long term … Read more