Head Office: Suite 1, 'Metro Market' 33 Hollywell Road, Biggera Waters Queensland 4216
Postal: P O Box 394, Runaway Bay, Queensland 4216 Australia
FREECALL
1800 670 440

FAQ's

 

What is a Balance Sheet?
 
A Balance Sheet is a document that shows the total assets and liabilities of a business. Assets would commonly include monies in the bank, plant and equipment, debtors (people who owe you money) and stock. Liabilities can best be summed up as what a business owes at the date the balance sheet was prepared. This is a document relevant to the individual, not the running of the business and as such is not required when assessing a business for sale. It is the owner’s private document.
 
What is Depreciation?

Depreciation is the gradual process of writing off the cost of an asset, or paying off a liability by means of a sinking fund, over a period of time. The plant and equipment of a business depreciates in value and usability every year. The depreciation rates are set by the Australian Taxation Office and applied by your Accountant when calculating depreciation. As depreciation is a no cash expense it is deleted as an expense when calculating the Net Profit of a business.
 
What is a Profit & Loss Statement? (P & L)

A Profit and Loss Statement shows the total revenue and expenses of a business for a certain period of time. Profit and Loss Statements require thorough investigation as the bottom line of a profit and loss can be influenced by many factors, such as ‘one off’ expenses, owners’ drawings or revenue that may not be relevant to normal trading. These items are called ‘add backs’ and while relevant to the present owner may not be relevant to the new owner.
 
What is ‘Cost of Goods Sold?’ (COGS)
 
Cost of Goods Sold is the total cost to the business of the goods sold during a specific period.
That is:
Opening Stock +(plus) Stock Purchases – (minus) Closing Stock = Cost of Goods Sold
 
What is Gross Profit? (GP)

Gross profit is the single most important figure in all businesses. This figure shows the difference between the revenue and the cost of goods for a business, ie: Total Sales – (minus) Cost of Goods = Gross Profit. Gross Profit is often expressed as a percentage of revenue, ie: [Gross Profit x (multiplied by) 100] divided by Total sales = GP%. What is an acceptable Gross Profit varies from industry to industry. What is certain though, is that for any business to be profitable and successful, its operating Gross profit to Sale ratio needs to be such that all other expense commitments can be met whilst returning an acceptable nett profit.
 
What is Goodwill?
 
Goodwill is an intangible asset that forms part of the sale price over and above the price asked for the tangible assets and stock. This component of the sale price represents a payment for the existing client base and the security of future profits. Some people say that when a business is sold that the goodwill walks out of the door when the owner leaves. This can be true in a few cases, but in general this is not the case as things such as the client base, location, staff, technical knowhow, special products or agencies etc do endure.
 
What is Inventory? (Commonly called Fixtures & Fittings or FF)
 
Inventory is a list of tangible assets of a business. Those items of plant and equipment, chattels, vehicles and furnishings that are necessary for the everyday running of the business. This is an important document for both buyer and seller as it forms part of the contract for sale of most businesses. In most cases any leases on these items are paid out by the vendor prior to settlement so that all are unencumbered.
 
What is Stock at Valuation? (SAV)

SAV is the total value of stock (products) that a business holds on the day prior to settlement, calculated at wholesale or cost price with all applicable trading discounts applied. Stock is usually counted and priced by an independent specialist stocktaker.
 
What is Stock Turn?
 
Stock Turn shows how many times, on average, the normal stock level was sold and replaced during the financial year. This is not a crucial figure for all businesses, but, for those such as manufacturing , wholesale and large retail, stock turn per annum can indicate how well stock purchasing, production and sales are geared. Add together the opening and closing stock and divide by two to give “average stock” in dollars - then the equation would be : Cost of Goods Sold, divided by Average Stock Level = Number of Stock Turns per year.
 
What is Loan Principal?

Loan Principal is the amount of money borrowed to fund an investment, and on which interest is paid.
 
What is Return on Investment? (ROI)

ROI is the acceptable return for your investment (that’s the net profit from the business) after you have paid yourself an appropriate wage for work performed. The ROI percentage is linked to current commercial loan rates so it will vary from time to time. For example 20% ROI may be an acceptable minimum return when you can borrow at 7.5%, but if rates increased to say 11%, then the ROI would need to be increased.
 
The following is an example of setting a fair market price for a business:
The business has a net profit of $200,000 after the owner has paid himself a wage, but before tax and interest. To offer the business at 20% ROI would therefore be $200,000 x 5 = $1,000,000 total sale price. You can apply any percentage ROI to set a sale price, but the ‘acid test’ is will the business sell at that price? All investment after all is risk versus reward. The total sale price is then split up into Stock + Inventory + Goodwill.
 
Multiples:
This is the same as ROI (as above) but expressed as a number, usually between one and five, which is used to multiply the net profit to give the total sale price.
Example: 20% ROI = multiple of 5.
 
So in the example above $200,000 ROI multiplies by 5 = $1,000,000 total sale price.
 
The choice of the appropriate multiple varies from business to business and also depends on the type of business.
 
What is Written Down Value? (WDV)

WDV is the monetary value of the tangible assets of a business as they age and suffer wear and tear. All items steadily lose value year by year and this is reflected in a depreciation schedule that is prepared by a business accountant and forms part of any financial year’s report.

The % depreciation rates on items are set by the Australian Tax Office (ATO) – examples – Computers 30%, steel safe 2.5% per year.
 
What are Fixtures, Fittings and Chattels (F & F) ‘as a going concern’?
 
Fixtures fittings and chattels are classified as machinery, vehicles, shelving, computers, cabinets, floor coverings, etc which may have a written down value in the Balance Sheet of $50,000, but in reality to replace the items is $320,000 – or in a worst case scenario of a ‘fire sale’, they may only fetch $11,000. That is why an arbitrary value is set, given that the F & F are still servicing the business and are working items.

The arbitrary value is set between the written down value (W.D.V.) and the replacement value. Is this example it would be negotiated around $125,000 in consultation with the vendor.
If the price received by the vendor is higher than the W.D.V. then he/she has to pay ‘capital gains tax’ on the difference.
 
What is the Sale Price – and how is it calculated?

The sale price of a business is made up of three components:
 
STOCK – This is a nominal figure and is approximately the value of stock at cost at the time of sale. However stock is counted the day before the sale date and may be more or less than the nominal stock.

F & F – This is a list of all the unencumbered items you will receive when you purchase the business.

GOODWILL – Goodwill is an accounting term used to reflect the portion of the book value of a business entity not directly attributable to its assets and liabilities. It normally arises only in case of an acquisition. It reflects the ability of the entity to make a higher profit than would be derived from selling the tangible assets. Goodwill is also known as an intangible asset.
 
What is a sale Time Line?

This time line provides an approximate timeframe that it will take to bring a business sale to settlement. Of course, many things can delay this process and that is where Raven’s can help smooth the way. Residential and residential property sales run a similar process albeit shorter, but all incorporate the following considerations:
 
Analysis, Proposal, Action, Screening, Offers, Contracts and Settlement.
In general from the time of initial contact with a broker to the time of takeover/settlement of the business, it can take a minimum of 12 weeks, occasionally shorter, sometimes longer. (See the ‘time line’ page in this website for a full explanation).
 
What is E.B.I.T?

This is short for Earnings Before Interest and Tax. That is the net profit before interest charges and personal/business taxation is paid.
E.B.I.T. is also called ‘Return On Investment’ (R.O.I.)
This is the most commonly used term to describe the profit of a business.
 
What is E.B.I.T.D.A?

This is short for “Earnings Before Interest, Tax, Depreciation and Amortisation”.
‘Depreciation’ has been explained above.
‘Amortisation’ is the goodwill figure paid for the business that is written off as a tax deduction a bit at a time over a period of years.
 
What is P.E.B.T.D.A?

This is short for Proprietors’ Earnings Before Interest, Tax, Depreciation and Amortisation – basically the same as E.B.I.T.D.A.