Adjust Cash Flow

To determine profitability value a business falls into, it is necessary to determine Adjusted Cash Flow of that business. The Adjusted Cash Flow is equivalent to its earnings before interest, depreciation, and taxes (EBIDT in accounting terms), plus additions or subtractions for owner’s salary, discretionary, single occurrence, or non-cash expenses. Once a thorough analysis of financial information has been completed, and Adjusted Cash Flow determined, category of Market Value is defined.

In general, a privately owned single or small (1-3) multi-unit business will fall into one of three profitability categories: Positive Cash Flow Break Even Asset Sale

Positive Adjusted Cash Flow This category will generally represent highest Market Value of an on-going business. In this situation business is profitable and established. The buyer is purchasing a combination of historical cash flow, fixed assets, operational assets (trade name, concept, menu, etc.) and goodwill. The Market Value for businesses in this category is based on a multiplier of Adjusted Cash Flow, that ranges between two (2) and five (5) times Adjusted Cash Flow. A second value is determined by using a multiplier of Gross Sales (net of sales tax) between 30% and 40%. Business value is generally somewhere within range of these two numbers. A sophisticated buyer expects that price they pay would net an annual return on investment between 20% and 50%.

EXAMPLE:Adjusted Cash Flow$ 65,000 x 3.75 =$243,750 Gross Sales 725,000 x 35% =$253,750

No matter who you are you will make mistakes at some point in your business life and unfortunately law is not very forgiving - ignorance is not a defence. Here are some of common pitfalls to watch out for when setting up your own business.

Partnerships

A partnership is formed when two or more parties form to start a business, sharing workload and investing capital to get things going. It is always wise to have a written partnership agreement and get it checked by a solicitor. If you do not have a proper agreement and it all goes wrong, partnership will be covered by Partnership Act 1890, whose provisions may not always seem fair.

For example, under it partners can withdraw without giving notice. This could mean they insist on immediate return of their capital and business may be forced to close down as a result. If you do not however, have an agreement you may be liable for all sorts of costs and you have no legal standing. It is very important to make sure all of your agreements are legal and will withstand in a court of law.

Clarify Relationships

You can find yourself in a partnership without realising it, for example, if you run a business with somebody but don't employ them, this often happens with husbands and wives or other family members. In a partnership, each partner is responsible for business debts incurred by other partners and there is no limit to their liability.

Put Everything in Writing

I cannot stress enough how important it is to have everything in writing. If things go wrong you have no legal standing without some form of documentation (which includes all correspondence), contracts are basis of all business relationships. A contract will include four key components: Consideration, an obligation to pay or a promise to provide something in return for something of value. Certainty, contract must clearly state what is expected of all parties. The intention to be legally bound and an offer and an acceptance. However, contracts can be oral and it isn't always clear when one has been made.

Confirm every agreement in writing so everyone knows where they stand. What is brief? Who will pay? When? How much? Are expenses included? What are acceptance criteria? Who will own copyright? It is important that all aspects are covered and that there are no grey areas.

Make Sure all Employees Have a Contract

It is very important to have a contract of employment in place from day one for all employees. Make sure that all new employees are entitled to work in this country, or you could face heavy penalties. The contracts act to protect both parties.

Know your Employment Laws

Employment laws in this country are very precise on what you can and cannot do. Before you fire someone, make them redundant or change their terms and conditions of employment, take legal advice. If you don't, you could find yourself open to claims for unfair dismissal, discrimination or breach of contract. Also warn employees that discrimination, sexual harassment and other illegal acts will not be tolerated.

The Importance of Health & Safety