Small business: advantages and disadvantages, examples and ideas

What is a small business in simple words

Small businesses include small entrepreneurial companies with a staff of no more than 100 people.

Such organizations are characterized by several distinctive features:

1. Small area. Here attention is paid to both the space occupied by office premises and the areas that the company serves.
2. Limiting the list of activities. A small business can be defined by the small variety in the types of goods or services provided.
3. Reducing the set of checks. Small organizations are provided with a kind of “vacation” by regulatory authorities. And when the time for supervision comes, this procedure does not last more than 50 hours a year.
4. No need to confirm status using special tools. Everything here is based on clearly defined criteria.

If everything is clear with the first three points, then the last one is worth considering more carefully.

Definition and features of small business

The development of small businesses increases competition, which curbs price increases and improves the quality of goods. It also helps solve the problem of unemployment; more than 50% of the population of developing countries work in this area. Small enterprises produce from 30 to 60% of national goods. We also recommend that you familiarize yourself with the types of small businesses.

According to World Bank estimates, there are about 50 criteria by which a newly formed organization can be classified as a small business. The most common criteria are determination of the number of employees, profit indicators and types of activities. Each state, based on economic development, sets rules for running small businesses.

For example, in 2020 the Russian Federation adopted the law “On Support of Medium and Small Businesses,” which stipulates that an enterprise with less than 15 employees is a microenterprise, up to 100 workers is a small enterprise, and more than 100 is a medium enterprise. Accordingly, organizations are also divided by the amount of profit received. Micro enterprises up to 60 million rubles, small – 400 million rubles, medium – 1 billion rubles. The established criteria for identifying a small business are convenient for banks to use when issuing loans, as well as for tax authorities. They are also the focus of government services that determine preferential programs and allocate funds for development. One of the advantages of the small business category is the opportunity to use a simplified taxation system.

Criteria characterizing small companies

Limitation of organizational and legal forms of enterprises

The legislation strictly limits the organizational and legal forms in which registration allows one to claim the “title” of a small form of business:

• Economical society;
• Economic partnership;
• Production cooperative;
• Consumer cooperative;
• Peasant (farm) economy;
• Individual entrepreneur.

This cannot include unitary enterprises, concerns and holdings, groups in the financial and industrial sector, religious and public associations.

Number of employees of enterprises

The average calculation of the number of employees in a company is based on data from the previous calendar year. It may be quite small. Business entities and business partnerships can be taken into account only if the other criteria are met.

Normalized return

The calculation takes into account, as in the previous case, the totality of the company’s income received in the previous calendar year. Financial revenues must be summed up taking into account current tax legislation. The final value will be used for tax calculations. To be able to classify an enterprise as a small business, the last figure should not exceed 800 million rubles.

Individual entrepreneurs who did not attract employees to carry out their activities during the reporting period will be classified only on the basis of the amount of income.

• An individual entrepreneur is an individual or legal entity
• What is business in simple words

Key Benefits

The main advantage of running a small business is that you don't need a lot of money to start your own business. Typically, start-up costs are negligible. Many people use a bank loan or funds received from friends for these purposes. They subsequently repay the debt.

It should also be taken into account that the state is interested in supporting this sector of the economy, therefore special loan programs with a low interest rate, preferential taxation and additional advantages have been prepared for small businesses.

Advantages and disadvantages of small business

Any form of business organization has its positive and negative sides. It is necessary to mention them from the point of view of a small company:

3.1. pros

Government support for small companies is, of course, the most important advantage compared to other business entities - this is clearly noticeable in terms of tax benefits and simplified rules for doing business.

Factors such as a relatively small number of employees and a fairly high level of production automation make it possible to use modern methods of employee management.

A small form of business, which is logical, has the properties of mobility and easy adaptability to sudden changes in the market. The costs of reorganizing such companies will be much less noticeable for the existing own budget.

A simplified document flow system and transparency of the structure of small businesses make it possible to promptly implement management decisions. There are no bureaucratic delays and constant lengthy “meetings” as in larger forms of business.

There is a separate chapter of the Labor Code of the Russian Federation that regulates labor safety issues in small enterprises. It is easier to foresee the presence of harmful and dangerous factors.

Certain categories of small business organizations have simplified personnel document flow. They are also relieved of the responsibilities for developing and adopting internal documents on labor regulations, any provisions on wages and bonuses, and shift schedules.

3.2. Minuses

The lion's share of small business organizations are found within large populated areas, which is also understandable. More consumers - more income. Identical production companies can bring high profits in central regions, but, conversely, in peripheral regions they can become unprofitable.

Small enterprises are often characterized by poor technical equipment, which makes them dependent on larger specialized organizations. This is due to the desire of management to get quick income in the least expensive way possible.

It is quite difficult for small companies to increase the scale of production capacity, as well as expand the range of unique products offered. This is facilitated by the lack of funds for the installation of more modern installations and technological lines. Hence, the performance indicators of small businesses can be significantly lower than those of medium-sized and, especially, large businesses. And, as a result, a decrease in trust in them from almost any credit institution.

Ill-conceived management methods and low qualifications of management personnel do not at all contribute to improving the results of the effective activities of small companies.

According to official statistical reports, 90% of small businesses experience problems with survival in the first year of their existence. And it is not solved by everyone. Therefore, very high levels of financial risks are traditional in this area.

Disadvantages of small business

Resource limitation

Small businesses require less investment, but small businesses also receive less income. The less income, the fewer ways for further development of the company.

For example: a large company with an annual turnover of about 700 million rubles can easily allocate 2–3 million rubles for the purchase of new equipment to produce new goods. And a small business with a turnover of about 100 million rubles per year and a net profit of about 200 thousand rubles per month will be forced to save for development. For example, to purchase the same equipment for 2–3 million rubles, an entrepreneur will have to spend all the net profit in 10–15 months.

High level of competition

Small businesses have a harder time competing with other companies. Large corporations develop their brands, offer customers favorable purchasing conditions, and work to increase the loyalty of their target audience. And small businesses in the vast majority of cases offer “everything like everyone else.” Due to limited income, entrepreneurs cannot build a strong competitive USP. For example:

• you cannot give discounts of 10–50%, because this will greatly affect profitability;
• It is impossible to offer clients comprehensive support, because the staff does not have enough necessary specialists, and hiring them for the sake of 1-2 clients is unprofitable;
• You can’t raffle off an apartment among clients - you first need to buy it, and this requires a lot of money.

High crisis risks

During a crisis, it is small companies that suffer: purchasing power decreases, suppliers raise prices for consumables, and revenues fall. For example, in 2020, in conditions of an unstable economy, more than 13,000 enterprises went bankrupt in Russia - this was written in the Versiya newspaper. This figure is almost close to the number of companies that closed during the crisis in 2009.

Small business data for 2020

The less turnover and net revenue a company has, the more difficult it is for it to survive the crisis and develop normally in an unstable economy. Many entrepreneurs note that even with import substitution programs and subsidies, incomes are falling noticeably.

“I hear people talking a lot about subsidies. I can’t say that this is a lie, I don’t know. But I know that I won’t get any subsidies. Because I have bare traditional retail. If I had a kindergarten, a hospice, an innovative enterprise or an import-substituting enterprise, then yes.

But these toy stores - no one needs them. And that means I have no chance of survival. Today I closed one of my stores. 240 meters of area. I can't fill it with goods, I don't have the money for that. I drag the goods like snot across the shelves and don’t bring anyone any pleasure. Neither for ourselves nor for our customers.

I compressed my two large stores to one 70 meters. Now I have abundance! Because I didn’t take money out of business for three years. And now they are in my toys.

If I were the only one who felt this way, I would admit that I am not a businessman and move on. But it turns out everything is still great for me. Others have it worse. In clothes, shoes, vegetables, food, cars, jewelry, furs, household items... That is, I monitor all areas of the capitalist economy. Everyone has! But it doesn't make me happy.

The state doesn't really need us. And no matter how deliberately, it helps you die in a crisis if you are not in a subsidized industry. I am not in a subsidized

From an interview with the owner of a children's toy store on Meduza

High production costs

Small businesses, especially in the first months after opening, cannot afford to purchase large wholesale quantities of raw materials and consumables. And the larger the batch, the greater the discount the supplier can make, and large corporations receive goods at the lowest price. Entrepreneurs with a small staff and income are forced to purchase consumables at almost retail prices or with a minimal discount. Because of this, expenses rise and income falls.

Bureaucracy

Bureaucracy is a problem for the entire country, not just small businesses. For example, just to receive a subsidy or grant, an entrepreneur will have to collect an impressive package of documents, which includes:

• certificate of payment of tax deductions;
• application, questionnaire and photocopy of the applicant’s passport pages;
• registration certificate;
• a document confirming education sufficient to conduct business activities;
• documents confirming the creation of additional jobs;
• certificates and checks confirming the investment of own funds in the business;
• business plan.

And after receiving money from the state, you need to properly account for it. If something goes wrong, the entrepreneur may be fined or deprived of subsidies.

It is more difficult for small businesses to deal with bureaucracy because such enterprises often do not have a legal department. Large companies have in-house lawyers, and it is easier for them to handle paperwork and tax reporting.

“Three years ago, I received a grant to develop my own business; I spent the money on organizing a roadside alcoholic cafe and a store selling agricultural products at a dairy mini-farm in the Sengileevsky district. But, unfortunately, the business did not take off.

Now I have my own web studio “Symmetry”, and things are going well. At the initial stage of business, most of my mistakes were associated with ignorance of legislation, including tax law. I have been fined a lot, for example, for incorrect reporting, and continue to be fined, despite the fact that I already know a lot in this regard.

It’s a pity that fiscal control authorities treat us entrepreneurs, especially beginners, without understanding. In addition, we simply lack information - for example, about the same changes in tax legislation."

From an interview with entrepreneurs on udelo.ru, the author of the commentary is Oleg Kainara, head of the Symmetry Medical agency

Types of small businesses

This part of the classification of companies in the business sector under consideration will not be difficult to understand. There are two types of small enterprises:

1 Organizations whose specialization is intermediate assembly or production of individual components, semi-finished products, assemblies. In this case, everything is simple - they sell their products, as a rule, to those consumers with whom they have entered into contractual relations. If such companies do not produce unique parts, then they are vulnerable to the harsh influence of a large customer, which has a fairly wide range of many competing small businesses.

2 Organizations whose orientation lies in the production of finished products. This group includes the majority of small businesses that build their income in the areas of information technology, construction, as well as the production of clothing, food and the like. Such companies are less dependent on a large manufacturer. Competition among such industries is determined by the availability of high-quality and unique products.

The remaining possible types of classifications have no practical side and there is no need to seriously consider them.

Benefits of small business

1. Minimum cash costs to start your own business. Most often, the idea of ​​starting a small business arises from those people who have some kind of hobby that can generate income in the future. When it comes to registering a business, the entrepreneur already has both the equipment and materials to start.
2. Ability to set your own working hours. In order to achieve a decent income from doing what you love, it is not necessary to sit for 12 hours at your desk. You can independently choose a time convenient for work, for example, it can be several hours in the morning and evening.
3. Obtaining long-awaited material independence. In order for your hobby to develop into production that brings good income, you need, of course, a lot of work. But once you achieve your goal, you will no longer have to go to paid work. You will be happy to work for the benefit of your family.

Small Business Enterprise Structure

In management systems for small organizations, all elements must meet modern requirements for efficiency, flexibility and simplicity. They must fulfill the task of ensuring the survival of this business in a highly competitive environment.

The organizational structure must include systems of mechanisms interconnected and leading to the designated goal. This is facilitated by the efficient use of resources.

When creating a small business, the founders need to understand its structure and the schematic distribution of powers between the management team. The more understandable this structure is, the more effective the functioning of individual links and elements will be.

At the stage of developing an organizational structure, it will be useful to think through the following fundamental factors:

• Key divisions of the company;
• Their interaction with each other;
• Quantitative and qualitative composition of each link;
• Levels of subordination of elements to each other.

When investors study these issues, it would be advisable to provide a graphical representation of the data being analyzed - various diagrams, tables. Organizing a small business will be as simpler and more effective as the connections between individual blocks, links, and elements are more logical for the production process.

Achieving such an effect may require leadership representatives to have a unique perspective and original thinking. And it is advisable to justify all this with clear modern examples.

Problems of small business in Russia

There are many problems of small business in Russia. Once you start with the design, you will encounter many pitfalls. Such as: difficulties with finding premises for production; selection of workers; insufficiently professional or low-quality equipment.

An important problem for an entrepreneur is solving financial issues. A novice businessman rarely has sufficient start-up capital; turning to a bank for help causes a lot of hassle. Interest rates that are too high, the dependence of ruble loans on foreign exchange rates, and the lack of favorable offers for small businesses make it difficult for enterprises to develop.

It is worth considering that the percentage of products produced by small enterprises on a market scale is so small that it may not have any impact on it. To deliver goods to the market, it is necessary to incur significant transportation costs. With weak purchasing power, you can simply end up at a loss. All this creates a weak outlook for small businesses. Nevertheless, an analysis of developing small enterprises in the Russian Federation shows that with the right work and proper investment, a small company can bring good profits. The issue of government support in such areas as: attracting investors, documentation, and receiving benefits is a very pressing issue in the development of the small business economy.

Victor Shemyakin Author #ВЗО. A young entrepreneur, he managed to open several projects of varying degrees of success. He shares his experience and opinions with our website. He will talk about what a novice businessman should know and do to make it easier to run his business and avoid possible problems.

[email protected]

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Criteria

Since 2020, a unified register of SMEs has been in operation. It includes companies that have received the status of small and medium-sized enterprises. The category of economic entities is determined by a number of criteria of financial and economic activity:

• amount of income;
• average number of employees;
• share of participation of other companies in the authorized capital.

For comparison, the criteria for small medium and large businesses are in the table:

According to Article 4 of the Federal Law “On the development of small and medium-sized businesses in the Russian Federation”, the established limits do not apply to:

• persons holding shares in the economic high-tech sector;
• persons participating in the Skolkovo project;
• companies that practically apply the latest technologies developed by their owners from among budgetary and scientific institutions;
• companies whose founders are included in the government list of persons who provide state support for innovation activities.

If an individual entrepreneur does not have employees, his status is determined by annual income. If individual entrepreneurs and LLCs are only included in the unified register of SMEs, their status is determined by the number of employees.

Small Business Examples

1. Grocery store (from the series within walking distance),
2. Hostel.
3. Shawarma kiosk.
4. Editorial office publishing online media.
5. Advertising agency.
6. Salon.
7. Information site.

You can find a huge number of examples around you. Small companies and individual entrepreneurs are the people who make our lives comfortable.

Many people want to not only do what they love, but also make a good profit from it. How successfully your enterprise will develop depends on how well the niche in the market and the strategy for moving forward are chosen, as well as on the innovations in the approach to building a business model.

Tips for starting a home business

For those who do not want to spend money on renting premises, you can look for home business ideas - this is a good approach to organizing a small business.

1. Without leaving your home, you can search for customers and cargo carriers, plan, and also manage cargo flows. An analogue of this type, at home, is a taxi dispatcher, and for more income you can even combine both activities.
2. A great idea for a home business could be providing consultations with a lawyer, accountant, psychologist, or tutoring. Providing similar services on the Internet, Skype, as well as advertising your activities can help increase your earnings. Advertising can be placed on social networks, this will allow you to attract customers not only from your city, region, but also from remote corners of our country.
3. In times of crisis, many people strive to start making something on their own; in such times, organizing handicraft courses can be very effective. This includes knitting, embroidery, making souvenirs and children's toys.

To prevent your business from going downhill, look for a team, check the product. Don't take unnecessary risks. Study your competitors.

The advantages of your business

• You are the boss, god and king
  . At least within the walls of your office. Just imagine not having a boss. After all, you yourself are a big boss. This means that you are free to make decisions, no one will mess with your brain, give you inappropriate instructions, yell at you or criticize you. People work for you and you boss them around. You become independent.
• Unlimited income.
  What is your current salary? 20,30, 50 thousand rubles? What if you say you want to get 200 or 500? Your employer will answer that this is impossible. By working for yourself, you can earn as much as is possible for you. Of course, we are very far from being on the top of Forbes, but many people are capable of becoming one of the richest people in their city.
• Many connections appear.
  What are connections? This is a circle of communication with individuals who have a certain impact on others. While you are here, your social circle is very limited - mostly work colleagues. As soon as you start organizing something of your own, you will learn to communicate with many “right” people, and through them to reach even more powerful people. Even communication with competitors can be beneficial; you have a chance to scale your enterprise together or create a monopoly. In any case, you will greatly increase your social circle, which means you will be a more significant person than you are at the moment.
• Increase your life adaptability.
  If you take a person who has worked as an employee all his life (90% of them today) and an entrepreneur with more than 10 years of experience in running his own business, then in terms of ability to extract money out of thin air, the second one will undoubtedly win. You will always have time to work for someone; you don’t need to think about it, just carry out the instructions entrusted to you. But the ability to make money in simple life circumstances is not given to everyone.
• Free time
  . This is not a contradiction to our first part. You will only have free time when you can put your business on autopilot. You will make it work without your participation, but under your close control. It is then that you will experience all the benefits of your work. Lying belly up in resorts in warm countries and receiving notifications about funds being credited to your account balance is the goal that needs to be achieved. Business is freedom, not slavery.
• Opportunity for self-realization.
  What do we do when we work for hire? In most cases, we do work that we don’t like, but at least somehow satisfies our basic financial needs. Working for yourself gives you a chance to do what you really want and what you like. The ability to turn a hobby into income is happiness.
• Help others.
  You can not only successfully organize your life, but also help other people. Creation of highly paid jobs, favorable conditions for its employees, philanthropic assistance to those in need. You have a chance to become an example of a strong, kind person and successful entrepreneur.

Conclusion:

Whether you work for your uncle all your life or become an uncle yourself depends only on you. I can only advise you not to be afraid of your desires, try to create what you have long dreamed or thought about. After all, a bad experience is also an experience. Good luck to you, may everything work out!

Every person who is going to open his own business must first decide what goals he wants to achieve through the planned activities, and whether he is ready for those unforeseen and difficult circumstances that may periodically arise in the process of doing business? It should be remembered that working for yourself has not only positive aspects, but also some significant and significant disadvantages, due to which every person does not do this.

Pros and cons of owning your own business

Positive aspects of owning your own business

If a person has decided to open his own business and has written out a business plan for a car service, then he can easily try himself in entrepreneurship, evaluate his own capabilities and use all his existing potential, skills and abilities. As a result of these actions, most entrepreneurs receive high profits, and are also completely freed from dependence on their superiors and can carry out activities at their own discretion. Typically, entrepreneurs have a lot of free time, and can also set any tasks for themselves and their employees and control the progress of their solution. As a result of their activities, each businessman receives invaluable and necessary experience in entrepreneurship, and also allows many people to get a job.

Disadvantages of owning your own business

However, it is important to consider not only the attractiveness of your business, but also some disadvantages that are quite significant and serious. It should be remembered that every entrepreneur constantly risks his own property, money and business. He is regularly under tension and experiences stable and fairly large loads. The income of businessmen will never be stable, and it is almost never possible to fully and well enjoy a vacation. If necessary, entrepreneurs have to spend their own savings to keep the business afloat or to pay unexpected fines or other expenses.

Features of entrepreneurial activity

Of course, each type of business has its own characteristics and characteristics. Activities related to the production or sale of food products, as a rule, are successful and quickly pay off, but it should be remembered that this business will be constantly monitored by various supervisory authorities, and these products also have a short shelf life, which is associated with possible losses and expenses.

Also, a lot depends on the chosen organizational form, since all varieties have specific features that every entrepreneur should be aware of at the registration stage. For example, an individual entrepreneur is liable with all of his personal property, while an LLC is liable for its obligations exclusively with the property of the company. Each organization maintains specific reporting, so individual entrepreneurs can do without a professional accountant, since they can fill out all the documents themselves, and the director of the LLC needs to hire a specialist to submit all the necessary and important documents to the tax authorities on time, in the required quality and condition.

The profit of any enterprise is influenced by the character and abilities of the entrepreneur, therefore, before starting activities, the future businessman must rationally and objectively assess his skills and capabilities.

Therefore, before opening any business, you need to resolve a lot of issues, evaluate all the positive and negative aspects, draw up a competent business plan and consult with knowledgeable people. Only when you are confident that the pros significantly outweigh the cons, you can start registering.

The market for selling ready-made businesses in Russia is growing year by year. More and more people want to invest money, even small ones, in a real business, to try themselves as an entrepreneur. And often the acquisition of an existing company is the best option for achieving these goals. But only if you approach the issue thoughtfully and thoroughly.

The slightest resistance from the seller in providing information is a danger signal!

When purchasing a ready-made business, regardless of its specifics, you can use the following algorithm of actions.

There are two ways to start a business (as well as expand an existing one): create a new business or buy an existing one. Having assessed the pros and cons of the second option, you can decide whether it is suitable, or whether it is better to use the first option.

Advantages of a ready-made business:

• The history of development, good or bad, which makes it possible to evaluate it.
• Availability of premises and equipment.
• Fully staffed.
• Well-established connections and sales channels.
• A finished product (service), sometimes an already well-known brand.
• A certain demand for goods (services), the ability to predict its change.
• Detailed financial and accounting reports.

Disadvantages of a ready-made business:

• Equipment may be worn out and technological processes may be outdated.
• The lease may not be renewed.
• The staff may be poorly qualified
• Counterparties may be unreliable; relations with them may have been damaged by the previous owner.
• Subsequently, debt obligations (unpaid taxes, penalties and customs duties or warranty obligations) may “surface”.

STEP 2. Select the type of business to purchase

To do this, you need to answer several questions:

1. Is there any type of activity or business that you have dreamed of?

2. Which type of business best matches your knowledge, skills and past experience?

3. What do you want to do: production, wholesale, retail or services?

4. Are you interested in business related to import-export?

4. Do you want to involve your family in working in a ready-made business?

Experts recommend first making a choice between production, retail, wholesale and services, then resolving the issue of import-export, and then determining a specific product (service) or market within the chosen sector.

STEP 3. Decide on funds

First of all, decide how much of your own funds you can allocate to complete the transaction. Then decide how much money you can and are willing to borrow (for example, from a bank).

Note:

the possibility of raising borrowed funds to purchase a business depends on the availability of liquid fixed assets and real estate. If you acquire a business that owns such assets, then in most cases you will be able to borrow 50% of the total cost of the business or investment project. Your personal assets can also serve as collateral for a loan to purchase a new business.

STEP 4. Select options that suit the cost

Entrepreneurs who want to sell their business place advertisements in free classified newspapers or in the line advertisement section of local periodicals, in any business publications or newsletters, or on specialized Internet sites. Another source of offers are broker companies specializing in the sale of ready-made businesses.

Note:

Sellers do not always publicly announce the sale of their business. The reason is that strict confidentiality must be maintained, since the announcement of a sale may cause unrest among customers, employees and suppliers. And many potential sellers choose to use personal networks to find buyers.

Therefore, it is also necessary to make inquiries among friends, acquaintances, entrepreneurs, lawyers, bank employees, accountants, consultants and colleagues. You can also interview suppliers or distributors in the business you are interested in.

STEP 5. Find out the reasons for selling the selected companies

The previous owner may have several of them:

• Changing of the living place.
  Lack of possibility of direct control and management of the process.
• Disagreements between owners.
  No joint agreement has been reached on ways to further develop the company.
• Loss of interest in business.
  After 6-8 years, the activity may simply cease to be satisfying.
• Illness, reaching advanced age.
  The owner's ability to manage the business is limited, and there are no worthy successors to the business.
• The need for investment in another project.
  The owner found a more profitable and less burdensome line of business.
• Sale of non-core assets.
  Some areas of activity of large enterprises or holdings are less profitable or do not fit into the overall development concept.

In principle, all reasons can be grouped as follows:

• this business has ceased to generate sufficient profit (the industry is experiencing a decline and decline in business activity; the company is under threat of bankruptcy; weak management; the company is involved in criminal scams, etc.);
• the owner intends to engage in some other business or diversify his activities; intends to retire for personal reasons; he does not have enough funds to develop the company.

It is clear that buying a company is advisable only when the owner of the company is guided by considerations included in the second group.

In principle, at this stage, out of all the previously selected options, two or three suitable ones remain.

In the conditions of the Russian market, it is still impossible to estimate the value of a company based on the market value of its shares, since only shares of large enterprises are quoted on the open stock market. Therefore, when assessing small and medium-sized businesses, experts recommend using the following approaches: profitable, market and cost.

Income approach

With this approach, the value of the company is determined by the amount of expected income. This method assumes that the buyer will not pay more for the business than the present value of future earnings for the period of interest. Using this approach, the buyer calculates various options for business development. However, with this approach, the level of risk is often determined too subjectively. This valuation method is good if the company's income is positive and stable.

Market approach

The value of a business is estimated by comparing the recent sales of companies of comparable size. The main condition for applying this approach is a mature market. The value of the company being valued (V1) is determined as the product of the ratio of the market price of the analogue company (V2) and its basic indicator (R2) by the basic indicator (R1) of the company being valued: V1=V2/R2×R1. The basic indicators are usually: net profit, book value of the enterprise. When choosing comparable companies, they are guided by the following requirements: the industry of the enterprises must match, the quantitative and qualitative characteristics of the company must be approximately equal.

Cost-effective approach

The cost of a business is determined by the amount of resources spent on its reproduction or replacement, taking into account physical and moral wear and tear. This approach is most effective when the buyer is looking to compare the costs of acquiring a business with the costs of starting a similar business.

There is no clear answer as to which assessment method to use. In each case, approaches are combined depending on the specifics of the business.

Note:

At this step, it makes sense to contact independent consultants, business brokers or professional appraisers. They often play a vital role. After all, determining the value of a business is a process that requires professional knowledge and experience in various fields of law, mathematical analysis, economics, accounting and auditing.

At this stage, as a rule, there is only one suitable option left.

STEP 7. Study the selected business in detail

If funds allow (and the game is worth the candle!), it is best to turn to professionals again and order Legal Due Diligence - a comprehensive check of the seller for “due diligence”. At a minimum, it will make it possible to clarify the reliability of the legal and financial information presented, check the correctness of the documents and their compliance with current legislation. As a maximum, “due diligence” includes conducting a legal and financial audit of accounting and tax accounting, assessing the suitability of top managers for their positions, conducting an inventory of property, etc. to infinity.

If there are not many doubts, and the transaction amount is not so large, you can try to do the above procedure yourself: ask as many questions as possible, demand reporting, inquire about the numbers and models of equipment and the dates of their purchase, make inquiries about business reputation, find out about everyone obligations of the acquired company, etc.

Note:

the slightest resistance from the seller in providing the information you are interested in is a danger signal!

There are also serious reasons for concern:

1. Shortened strict time frames for selling a business.

2. Key information on the object is missing.

3. Obtaining even existing information is difficult.

4. There is no clear reason for the sale or justification; the reasons for the sale are not credible.

5. It was discovered that the seller distorted or incorrectly interpreted at least part of the information about the property.

STEP 8. Minimize possible risks

1. Investigate anything that could potentially harm your business.

2. Find out the condition of the property complex and the features of its location. This will prevent problems, for example, due to the termination of a lease agreement.

3. You need to rely on facts and, if possible, not take your word for it, no matter how trustworthy the seller may be. This is especially true for the volume of profit and turnover of the company declared by the seller.

4. Offer to conclude a guarantee agreement on the absence of debts that do not go through the accounting department. It is signed by all founders and the CEO. The buyer's legal protection is that once the warranty deed is signed, they are personally liable for any borrowings by the company during the last three years. If negative consequences arise, the buyer has the opportunity to send the creditors to their real debtor, or, if the case goes to court, to file a recourse claim to protect their rights.

5. Lawyers also recommend drawing up a detailed plan for the transfer of management powers. This is especially important for maintaining relationships with customers, suppliers, partners in other operations and employees of the acquired enterprise. After all, it is important for the buyer to maintain a viable business.

6. The agreement with the seller must indicate that the new owner acquires only those debts related to the activities of the enterprise that are specified in the agreement. And debts associated with the previous activities of the enterprise do not pass to the new owner. The agreement and its annexes must contain a detailed list of all debts included in the enterprise, indicating the creditors, the nature, size and timing of their claims.

STEP 9. Start negotiations to purchase

If all your doubts are resolved positively, make a formal offer and proceed to negotiations.

Note:

Sellers prefer not to deal with unserious buyers, so don't be surprised if you are asked to put down a deposit, similar to what is done in real estate transactions.

As a rule, in negotiations, both parties start with maximum and minimum offers and gradually soften their terms. Therefore, you must determine in advance the price and terms on which you agree to purchase the business. Naturally, start with more favorable conditions for yourself. Be prepared for the seller to meet your first offer with terms that you consider unfair. This is an inevitable part of bargaining. If your intentions are serious, work towards terms you agree to accept.

STEP 10. Buy a business!