Having a business for sale can mean a lot of things – more than people might think. How does one business value compare to another, and how to arrive at that value? Because there are many types of businesses that exist for many different industries, it stands to reason there are numerous ways of approaching the process to find the value.

There are the three main approaches to value, which are the income approach, the market approach, and the asset approach. There are variations of these approaches, and combinations of them, and things which must be looked at because each and every business will have variations of what gives the business worth, and some of these differences are substantial.

First we must identify the type of sale: stock sale or asset sale. A stock sale is the sale of the company stock; the buyer is buying the company based upon the value of its stock, which represents everything in the business: earning power, equipment, goodwill, liabilities, etc. In an asset sale, the buyer is buying the company assets and capital which enable the company to make profits, but is not necessarily assuming any liabilities with the purchase. Most small businesses for sale are sold as an “asset sale”.

Our question, when selling a business or buying a business, is this: what are the assets considered to arrive at an accurate value? Here we will look at some of the most common.

1. FF and E: This abbreviation stands for furniture, fixtures, and equipment. These are the tangible assets used by the business to operate and make money. All businesses (with a few exceptions) will have some amount of FF&E. The value of these can vary greatly, but in most cases the value is included in the value as determined by the income.

2. Leaseholds: the leasehold is the lease agreement between the owner of the property and the business that rents the property. The agreed upon leased space typically goes with the sale of the business. This can be a significant value, especially if there is an under market rate currently charged and the lessor is obligated to continue with the current terms.

3. Contract rights: many businesses do business based on ongoing contracts, agreements with other entities to do certain things for certain periods of time. There can be immense value in these agreements, and when someone buys a business he or she is buying the rights to these agreements.

4. Licenses: in certain business sales, licenses do not apply; in others, there can be no business without them. Building contracting is one of them. So is accounting. For a buyer to buy a business, his purchase includes either buying the license to the company or the license to the individual. Often times, the buyer will require the access or availability of the license as a contingent element of the sale.

5. Goodwill: Goodwill is the earnings of a business above and beyond the fair market return of its net tangible assets. In other words, whatever the business makes in excess of its identifiable assets is considered “goodwill” income, where there exists a synergy of all of the assets together. This one can be tricky. Most business owners assume they have goodwill in their business, but goodwill is not always positive; there is such things as “negative” goodwill. If the business makes less than the sum total of its identifiable assets, there exists negative goodwill.

6. Trade secrets: some businesses are all about secrets. The reason the business is in operation may be because of a trade secret, some aspect of a product or service that sets it apart and gives it a market. In a business purchase, these secrets have value and go with the sale.

7. Trade names, telephone numbers, websites, and domain names: some businesses generate business simply because of its name and identifiable aspects. If those were to change, so would the profits. So in buying a business, the buyer will have need of those names and numbers to continue on in business. Of course, in some cases these things would not matter at all, and that is why each one must be approached individually.

8. Works in progress: a construction company may have a multi-million dollar job going on at the time of the sale, which can take months to complete. In case such as this, the buyer would have need of continuing on in the particular job the company was engaged in; for money and for reputation. This is considered a work in progress and has value and therefore is considered an asset and made part of the sale.

9. Business records: the history of a business detailed in documents and spreadsheets must necessarily become part of the business sale. The new owner can make use of records in identifying progress, tracking increased or decreased sales, adjusting expenditures and depreciation rates, etc. When someone purchases a business, they are buying the current operation and all the details that led to it.

10. Real estate: the seller-owned property on which the business does its business is inherent to the operation and therefore the value. There are times when the new buyer needs to move the business to purchase it, but more often the real estate is viewed as a major aspect of the business value, especially if there is equipment attached to the property and buildings suited specifically to the business.

When a business for sale is valued by a professional appraiser, a business broker, or a business owner, more than just the income is considered. Assets, economic values used by the business to produce revenue and profits, are weighed heavily to determine the worth of the business. And they must be considered to understand what a “business for sale” really means to a buyer.

As we continue to sift dutifully through the over 1,000 pages of the stimulus bill (American Recovery and Reinvestment Act of 2009), there is one provision that is not getting much attention, but could be very helpful to small businesses. If you are a small business and have received an SBA loan from your local banker, but are having trouble making payments, you can get a “stabilization loan”. That’s right; finally some bailout money goes into the hands of the small business owner, instead of going down the proverbial deep hole of the stock market or large banks. But don’t get too excited. It is limited to very specific instances and is not available for vast majority of business owners.

There are some news articles that boldly claim the SBA will now provide relief if you have an existing business loan and are having trouble making the payments. This is not a true statement and needs to be clarified. As seen in more detail in this article, this is wrong because it applies to troubled loans made in the future, not existing ones.

Here is how it works. Assume you were one of the lucky few that find a bank to make a SBA loan. You proceed on your merry way but run into tough economic times and find it hard to repay. Remember these are not conventional loans but loans from an SBA licensed lender that are guaranteed for default by the U.S. government through the SBA (depending upon the loan, between 50% and 90%). Under the new stimulus bill, the SBA might come to your rescue. You will be able to get a new loan which will pay-off the existing balance on extremely favorable terms, buying more time to revitalize your business and get back in the saddle. Sound too good to be true? Well, you be the judge. Here are some of the features:

1. Does not apply to SBA loans taken out before the stimulus bill. As to non-SBA loans, they can be before or after the bill’s enactment.

2. Does it apply to SBA guaranteed loans or non-SBA conventional loans as well? We don’t know for sure. This statute simply says it applies to a “small business concern that meets the eligibility standards and section 7(a) of the Small Business Act” (Section 506 (c) of the new Act). That contains pages and pages of requirements which could apply to both types of loans. Based on some of the preliminary reports from the SBA, it appears it applies to both SBA and non-SBA loans.

3. These monies are subject to availability in the funding of Congress. Some think the way we are going with our Federal bailout, we are going be out of money before the economy we are trying to save.

4. You don’t get these monies unless you are a viable business. Boy, you can drive a truck through that phrase. Our friends at the SBA will determine if you are “viable” (imagine how inferior you will be when you have to tell your friends your business was determined by the Federal government to be “non-viable” and on life support).

5. You have to be suffering “immediate financial hardship”. So much for holding out making payments because you’d rather use the money for other expansion needs. How many months you have to be delinquent, or how close your foot is to the banana peel of complete business failure, is anyone’s guess.

6. It is not certain, and commentators disagree, as to whether the Federal government through the SBA will make the loan from taxpayers’ dollars or by private SBA licensed banks. In my opinion it is the latter. It carries a 100% SBA guarantee and I would make no sense if the government itself was making the loan.

7. The loan cannot exceed $35,000. Presumably the new loan will be “taking out” or refinancing the entire balance on the old one. So if you had a $100,000 loan that you have been paying on time for several years but now have a balance of $35,000 and are in trouble, boy do we have a program for you. Or you might have a smaller $15,000 loan and after a short time need help. The law does not say you have to wait any particular period of time so I guess you could be in default after the first couple of months.

8. You can use it to make up no more than six months of monthly delinquencies.

9. The loan will be for a maximum term of five years.

10. The borrower will pay absolutely no interest for the duration of the loan. Interest can be charged, but it will be subsidized by the Federal government.

11. Here’s the great part. If you get one of these loans, you don’t have to make any payments for the first year.

12. There are absolutely no upfront fees allowed. Getting such a loan is 100% free (of course you have to pay principal and interest after the one year moratorium).

13. The SBA will decide whether or not collateral is required. In other words, if you have to put liens on your property or residence. My guess is they will lax as to this requirement.

14. You can get these loans until September 30, 2010.

15. Because this is emergency legislation, within 15 days after signing the bill, the SBA has to come up with regulations.

Here is a summary of the actual legislative language if you are having trouble getting to sleep:

SEC. 506. BUSINESS STABILIZATION PROGRAM. (a) IN GENERAL- Subject to the availability of appropriations, the Administrator of the Small Business Administration shall carry out a program to provide loans on a deferred basis to viable (as such term is determined pursuant to regulation by the Administrator of the Small Business Administration) small business concerns that have a qualifying small business loan and are experiencing immediate financial hardship.

(b) ELIGIBLE BORROWER- A small business concern as defined under section 3 of the Small Business Act (15 U.S.C. 632).

(c) QUALIFYING SMALL BUSINESS LOAN- A loan made to a small business concern that meets the eligibility standards in section 7(a) of the Small Business Act (15 U.S.C. 636(a)) but shall not include loans guarantees (or loan guarantee commitments made) by the Administrator prior to the date of enactment of this Act.

(d) LOAN SIZE- Loans guaranteed under this section may not exceed $35,000.

(e) PURPOSE- Loans guaranteed under this program shall be used to make periodic payment of principal and interest, either in full or in part, on an existing qualifying small business loan for a period of time not to exceed 6 months.

(f) LOAN TERMS- Loans made under this section shall:

(1) carry a 100 percent guaranty; and

(2) have interest fully subsidized for the period of repayment.

(g) REPAYMENT- Repayment for loans made under this section shall–

(1) be amortized over a period of time not to exceed 5 years; and

(2) not begin until 12 months after the final disbursement of funds is made.

(h) COLLATERAL- The Administrator of the Small Business Administration may accept any available collateral, including subordinated liens, to secure loans made under this section.

(i) FEES- The Administrator of the Small Business Administration is prohibited from charging any processing fees, origination fees, application fees, points, brokerage fees, bonus points, prepayment penalties, and other fees that could be charged to a loan applicant for loans under this section.

(j) SUNSET- The Administrator of the Small Business Administration shall not issue loan guarantees under this section after September 30, 2010.

(k) EMERGENCY RULEMAKING AUTHORITY- The Administrator of the Small Business Administration shall issue regulations under this section within 15 days after the date of enactment of this section. The notice requirements of section 553(b) of title 5, United States Code shall not apply to the promulgation of such regulations.

The real question is whether a private bank will loan under this program. Unfortunately, few will do so because the statute very clearly states that no fees whatsoever can be charged, and how can a bank make any money if they loan under those circumstances. Sure, they might make money in the secondary market, but that is dried up, so they basically are asked to make a loan out of the goodness of their heart. On a other hand, it carries a first ever 100% government guarantee so the bank’s know they will be receiving interest and will have no possibility of losing a single dime. Maybe this will work after all.

But there is something else that would be of interest to a bank. In a way, this is a form of Federal bailout going directly to small community banks. They have on their books loans that are in default and they could easily jump at the chance of being able to bail them out with this program. Especially if they had not been the recipients of the first TARP monies. Contrary to public sentiment, most of them did not receive any money. But again, this might not apply to that community bank. Since they typically package and sell their loans within three to six months, it probably wouldn’t even be in default at that point. It would be in the hands of the secondary market investor.

So is this good or bad for small businesses? Frankly, it’s good to see that some bailout money is working its way toward small businesses, but most of them would rather have a loan in the first place, as opposed help when in default. Unfortunately, this will have a limited application.

Wouldn’t it be better if we simply expanded our small business programs so more businesses could get loans? How about the SBA creating a secondary market for small business loans? I have a novel idea: for the moment forget about defaults, and concentrate on making business loans available to start-ups or existing businesses wanting to expand.

How about having a program that can pay off high interest credit card balances? There is hardly a business out there that has not been financing themselves lately through credit cards, simply because banks are not making loans. It is not unusual for people to have $50,000 plus on their credit cards, just to stay afloat. Talk about saving high interest. You can imagine how much cash flow this would give a small business.

We should applaud Congress for doing their best under short notice to come up with this plan. Sure this is a form of welcome bailout for small businesses, but I believe it misses the mark as to the majority of the 27 million business owners that are simply looking for a loan they can repay, as opposed to a handout.