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The Value of a Business During Tough Economic Times

By Kristin Gabriel

Republish: EasyPublish™ Published: 24Jun2009 Word count: 720 Viewed: 201 time(s) Get Free Content For Your Site

Today's small business owners are struggling and many looking for answers as to how these tough times will affect the overall value of their businesses.

It is times like this in our economy when we actualy see an increase in a tactic known as invoice factoring, when a business sells its accounts receivable invoices at a discount. Invoice factoring has helped many companies survive and stay in business in the midst of the current global economic downturn.

A recent report tracking the health of small business, (BizBuySell.comZ) indicates that there has been a decline in business-for-sale transactions and valuations. Plus, the number of closed transactions reported in the first quarter decreased by 36 percent as compared to the same 2008 time period.

Another area that is dropping during this current economic environment are the value metrics for businesses. Revenue multiples for closed transactions dropped 5.5 percent to .69 in the first quarter of 2009, while cash flow multiples fell 3.8 percent to 2.69. The way this is determined is by dividing the selling price of a business by its annual revenue or cash flow.

The same report also indicates that median business sale price for closed transactions decreased 17.3 percent to $165,500.

Valuation multiples are going down and now buyers are hesitant to pay the asking prices for a business. Uncertainty causes concerns about a business's cash flow and future revenues.

Apparently buyers are having difficulty accessing the capital they need to purchase a business, and keep it going. The traditional banks, and venture capitalists, or angels, as well as SBA-backed loans have all simply dried up. Therefore, when there are fewer buyers able to bid on most businesses, there's less pressure for upward pricing.

Economic conditions have made it more difficult to close deals tyhan ever before, but a number of business brokers are reporting a record number of buyer inquiries due to an increasing number of layoffs.

The good news is that market conditions for small business transactions should improve as selling prices continue to decline. The reason for this is because credit will slowly become available to new buyers.

Standard factoring companies have been around for more than 4,000 years. A highly effective cash management strategy, invoice factoring allows businesses to obtain funds based on their current accounts receivables and benefit immediately from 90 percent advances against invoices that would otherwise not be paid for 30, 60 or 90 days.

A business often times doesn't get paid right away for a product or service that it has already delivered, so the bottom line is that accounts receivable factoring, also known as single invoice factoring, might be an answer. Factoring is an extremely quick way to turn a company's receivables into cash rather than waiting up to 90 days for an invoice to be paid. Factoring companies - also knows asn factors - will look at your customers' credit rather than yours. The single invoice factoring process includes due diligence that typically takes one to two business days. Once completed the client is at liberty to offer invoices to the factor for purchase.

Factoring is not a loan - it is the purchase of a financial asset, or the receivable. Factoring varies from a bank loan in several ways. Banks base their decisions on a company's credit worthiness, whereas factoring is based on the value of the receivables. Bank loans involve two parties, while factoring involves three parties.

Factors typically look at the creditworthiness of a client's customers and they do not expect to buy 100 percent of a company's receivables. There are no minimum or maximum sales volume requirements. All the factors professional rates are competitive because each client's circumstances vary, which may have an impact on the fees charged. The program allows choices of invoices to be factored, enabling customers to retain most of their money, while spending the minimum fees to guarantee adequate cash flow.

Upon receipt of invoices, the factoring company checks the credit of the debtor named on the invoice to make certain that the sale represented has been fompleted satisfactorily. Once completed, the debtor is advised of the purchase by the factor and the client receives their funding. At the end of the credit period, the debtor pays the factoring company directly completing the transaction.

Single invoice factoring, or spot factoring, is an extremely fast way to turn receivables into cash.

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