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Category Archives: Valuing a Small Business

Business Planning in a Down Economy

By | Business By The Book, Buying a Business, Buying a Franchise, Growing a Business, Growth Strategy, Increasing Profitability, Investing in Small Businesses, Planning, Starting Up, Valuing a Small Business, Writing a Business Plan | No Comments
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Q: Should the economic forecast be an important factor in determining the type of business to start or acquire? A: Most businesses that are acquired or started are done so with a long time horizon in mind. Add to that the fact of the typical continuous cycles of any economy: (downturn, bottom out, upturn, and peak). Given that long-term view and the necessary expectation of economic cycles that almost defy the ability to forecast the timing of those trends, it’s more important to pick an industry/market in which you have loads of experience and create a superior offering with a…

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How to Read an Income Statement

By | Accounting, Basic Accounting, Business By The Book, Finance, Financial Reporting, Valuing a Small Business | No Comments

Q: What expenses comprise the differences between the terms “total revenue”, “operating income”, and “net income”? A: The easiest way to explain that is to walk through an Income Statement with you. Let’s use a really simple fictitious statement as the one shown below. Even though accounting is far more science than art, there are many terms for the same items and it can be confusing. For several of the main categories, I’ve shown in brackets and italics some alternate terms.   Explanations: Revenue – While the most common term to describe the amount of sales a company recognizes in the given period…

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Expect Negative Surprises When Acquiring a Business

By | Accounting, Business By The Book, Business Development, Buying a Business, Financial Reporting, Growth Strategy, Investing in Small Businesses, Negotiations, Ownership & Purpose, Selling a Small Business, Valuing a Small Business | No Comments

Some aspiring entrepreneurs will get started by buying an existing small business and many business owners have growth plans that include buying up other businesses to add larger chunks of growth via acquisition (mergers and acquisitions or “M&A” growth as opposed to “organic” growth). And if you are a business owner, you will most likely at some point sell your business. So here’s a few tips to both sides of the transaction… While it may not be statistically significant in terms of all the deals ever done, in my experience of negotiating with roughly 300 prospective sellers, signing approximately 75 letters…

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Venture Academy Video Excerpt: Equity Financing and Venture Capital

By | Business By The Book, Finance, Financing a Small Business, Investing in Small Businesses, Valuing a Small Business | No Comments

This video gives a fairly thorough explanation of raising different types of venture capital at the various stages of a company’s life:     This video is just 1 of nearly 200 videos available with a Venture Academy subscription and is excerpted from the Finance and Accounting section.

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How to Negotiate a License and Royalty Agreement

By | Business By The Book, Finance & Accouting, Negotiations, Planning, Selling Your Idea or Invention, Valuing a Small Business | No Comments

Q: We are beginning negotiations for a royalty/license agreement. What is the customary way to value what we should receive as a royalty/license fee? Do you have a template we could use to save on legal fees? A: A license and royalty agreement would generally be used when an author, producer, inventor, or other creator licenses their product, content, or invention to another company to take it to market for them. See How to Determine Whether to Patent and Produce an Invention or License it to Another Company and How to Take an Invention to Market for some examples. The bottom line is that creating a…

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Granting Sweat Equity in a Startup

By | Business By The Book, Financing a Small Business, Financing a Startup, Investing in Small Businesses, Leadership and Employees, Organization & Strategy, Valuing a Small Business | One Comment

Q: What is the best way to negotiate and grant someone “sweat equity” in my startup? A: Granting sweat equity in exchange for services rendered can be a creative and effective way to ramp up your startup with limited capital. The considerations will vary slightly depending upon which compensation method you use, but include i) the market value of your business, ii) the market value of the contributor’s sweat equity, iii) the risk premium, and iv) how the sweat equity is compensated. Market Value of Your Business – If the sweat equity is compensated in the form of equity, then both…

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How Not to Buy a Company

By | Business By The Book, Business Software, Buying a Business, Finance, Financing a Small Business, Investing in Small Businesses, Organization & Strategy, Tech, Valuing a Small Business | No Comments

A few years ago I was looking at a business plan involving software that was several years old and was being repositioned to sell into a new market segment. While reviewing the plan, I was immediately transported back in my memory to a good number of years ago when I acquired a software company and learned many painful lessons along the way. It was my very first acquisition, my very first time in the software industry, and my very first time as a CEO. (Looking back on that entire experience I can now see the foolishness of tackling a new…

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