When valuing a business for sale, start by reviewing basic financial statements.

Example: A husband and wife have been working in his father’s small business for almost four years now. They would like to buy his small business from him. It is a independent copier/fax dealership located in a small town.

They know the market potential and that his accountant has taken advantage of all of the possible loop-holes to shelter him from taxes. This will be the first year that the financials will depict a (pretty close) picture of the company. How do they evaluate the company and gain a fair evaluation of what they should offer him for his company?

Two major financial statements should be reviewed with their accountant, the balance sheet and the statement of income and expense.

The Balance Sheet should show how the assets, liabilities and net worth of the business are valued. Items shown on the Balance Sheet may not tell the entire story. For example, is the equipment valued realistically? The equipment may be obsolete despite what is shown on the statement. Are the accounts receivable fully collectable? Also, the liabilities may not reflect contingent liabilities, such as a pending lawsuit or potential tax liabilities. These are just a few of the many questions you must ask to determine true value of a business.

Looking at the next important financial statement is the Statement of Income and Expense (also called the Profit and Loss Statement). Are the sales correctly reflected? Unfortunately, many businesses dealing with cash do not deposit all the sales receipts. If so, how can the seller prove the correct sales? Or, when anticipating selling the business, the sales may be overstated. The expenses may contain personal items that are not business related. The point I am trying to make is that you need an experienced CPA or business appraiser who represents your interests to represent you when buying a business.

In this example we may be dealing with a father who is trying to help his kids as fairly as he can. He may be willing to agree to terms that will not be a strain on their finances. We may also assume that in retirement, he would like to have an ongoing income stream from the business. Since the business shows good prospects for the future I can envision structuring a deal that is beneficial to both of them. The idea is for the buyers to give as small a down payment as possible to afford them maximum working capital.

A percentage of the gross sales or net profits can be paid out to the father for a certain numbers of years. Using such a formula will enable him to benefit by any future growth in the business. To arrive at a total payout amount would, of course, require knowing a lot more information that the SILVANO GROUP will acquire. We ask all the right questions.

These days, it seems a lot of real estate investors are researching the topic of buying a home in foreclosure — and with good reason, too. That’s because there are a lot of foreclosure homes on the market right now, so there are plenty of good deals to be found. That is, if you know a thing or two about buying foreclosure homes the smart way.

If you’re coming into this article with very little knowledge about this subject, don’t worry. We will start with the basics and progress from there. With that said, let’s start with the reasons that buying a home in foreclosure is popular in the first place.

Buying Foreclosures Can be a Good Investment

The first thing you’ll notice above is that I said buying a home in foreclosure “can” be a good investment, suggesting the possibility (but not the certainty) of getting a good deal on a home. This is what attracts people to the practice of buying foreclosures in the first place, the possibility of getting a home for less than market value.

Some people use this practice as a way to purchase the home they intend to live in. Other buy foreclosure homes for a living, turning them around for a profit and moving on to the next deal. Regardless of which camp you fall into, there are certain things you need to know about buying a home in foreclosure before you venture out to do so.

The first thing you should understand is the basic path to foreclosure. Actually, this process varies a bit from one state to another. But the overall process of a home being foreclosed upon goes something like this:

The homeowner begins to miss payments on the mortgage (defaults).

The lender will send notices of late / missed payments to the homeowner.

The homeowner may work with the lender to get caught up on back payments through such tactics as reinstatement (lump sum payment), repayment plans or forbearance.

If homeowner continues to default, the lender will begin the foreclosure filings. *

The homeowner may try to sell the home through a real estate short sale.

If the home is not sold via the short sale process, the lender will foreclose and make an announcement of a forthcoming foreclosure sale / auction.

The lender will attempt to sell the property at auction.

Eventually, the home will be sold to a new owner in some manner.

* This is one of the steps that vary from state to state. The process that lenders must go through to file for foreclosure and to actually foreclose on the home can take days, weeks or months, depending on the state laws.

This is obviously a simplified version of events, but it should give you a better understanding of the basic process in place here. Understanding this process is the first step to buying a home in foreclosure — in a way that leads to profit.

Why It’s a Good Investment

So now that you understand a little more about the process, you can begin to see the potential investment value of buying a foreclosure property. This is an expensive process for the lender to go through, especially when it goes all the way through the series of events to a real estate auction. So in most cases, the lender wants to avoid foreclosure as much as possible. That’s where the real estate short sale comes into the picture (see item #5 on the list above).

The short sale is a way to sell the home quickly while it’s still in the pre-foreclosure stage (not yet foreclosed upon). That way, the homeowner can avoid a big blemish on their credit histories, and the lender can avoid losing more money (by taking ownership, managing the property, paying additional fees, marketing the property, etc.).

So what is a real estate short sale and how can you use it to buy a home for less than market value? To answer this question, we have to look at the typical process of a home going into foreclosure (keeping in mind that this process varies from state to state).

You can learn all about the short sale process right here. But for now, suffice it to say that the home is typically sold for less than market value so that it sells quickly. That is the lender’s goal in the short sale — to sell the home quickly so that they can get the nonperforming loan off their books, not to mention eliminating the hassle of the home-foreclosure process.

So the short sale is one way in which a buyer / investor can get the property for less than market value. So that’s one of the ways buying a home in foreclosure can be a good investment.

At the Real Estate Auction

But what if the home does not sell via the short sale, and instead it goes all the way through to the real estate auction? Here too the buyer can often get a good deal. At a real estate auction, foreclosed homes typically start off at less than market value. And unless the bidders drive the price up by over-aggressive bidding, the home can still be acquired for less than market value.

In other words, buying a home in foreclosure can take place on the “front end” as well as the “back end.” You can buy the property through a short sale when it’s in the pre-foreclosure stage, or you can buy it through an auction after it has been fully foreclosed upon. Of course, with other investors trying to do the same thing, you won’t always have such options. But at least now you understand those options a little better.

The Silvano Group can help through a buyer’s agency agreement. We will follow each process to closing. We will negotiate price for you so you’ll get the best value for you money.