36:["$","$L37",null,{"category":"$38","relatedArticles":[{"id":"cG9zdDoyNjQ3ODU=","databaseId":264785,"postId":264785,"author":{"node":{"id":"dXNlcjoz","databaseId":3,"userId":3,"avatar":{"url":"https://secure.gravatar.com/avatar/47938df052bf0a5283bd6b77ab786737?s=96&d=mm&r=g","size":96,"__typename":"Avatar"},"description":"SmartAsset employs a team of writers and editors with years of experience in the editorial, news and personal finance industries. Some staff members also hold the Certified Educator in Personal Finance (CEPF®) designation from the Institute for Financial Literacy.","additionalMeta":{"expertise":null,"__typename":"User_Additionalmeta"},"email":null,"firstName":"Michael","fullName":"SmartAsset Team","lastName":"Carvin","name":"SmartAsset Team","postCount":{"pageInfo":{"offsetPagination":{"total":1417,"__typename":"OffsetPaginationPageInfo"},"__typename":"UserToPostConnectionPageInfo"},"__typename":"UserToPostConnection"},"slug":"mcarvin","__typename":"User"},"__typename":"NodeWithAuthorToUserConnectionEdge"},"categories":{"nodes":[{"id":"dGVybToxOTU0Mw==","children":{"nodes":[],"__typename":"CategoryToCategoryConnection"},"databaseId":19543,"categoryId":19543,"link":"https://smartasset.com/other-small-business/articles","name":"Other","postCount":{"pageInfo":{"offsetPagination":{"total":5,"__typename":"OffsetPaginationPageInfo"},"__typename":"CategoryToPostConnectionPageInfo"},"__typename":"CategoryToPostConnection"},"slug":"other-small-business","ancestors":{"nodes":[{"name":"Small Business","slug":"small-business","__typename":"Category"}],"__typename":"CategoryToAncestorsCategoryConnection"},"parent":{"node":{"name":"Small Business","id":"dGVybToxMQ==","slug":"small-business","__typename":"Category"},"__typename":"CategoryToParentCategoryConnectionEdge"},"__typename":"Category"}],"__typename":"PostToCategoryConnection"},"content":"$39","date":"2024-10-09T14:25:38","excerpt":"

\n","featuredImage":{"id":"cG9zdDoyNjQ3ODg=","databaseId":264788,"altText":"A business woman creating a due diligence checklist for the purchase of a business.","date":"2024-10-09T14:23:00","fileSize":181707,"mimeType":"image/jpeg","modified":"2024-10-09T14:24:00","sourceUrl":"https://smartasset.com/wp-content/uploads/sites/2/2024/10/iStock-1766721371.jpg","__typename":"MediaItem"},"modified":{"datetime":"2024-10-9","readable":"October 9, 2024"},"multipleBylinesByRole":{"editedBy":{"id":"dXNlcjoxMTc=","databaseId":117,"userId":117,"avatar":{"url":"https://secure.gravatar.com/avatar/9fffe2eb35204e151b68731435d247c5?s=96&d=mm&r=g","size":96,"__typename":"Avatar"},"description":"Arturo Conde is a senior editor at SmartAsset. He has a master’s from the Graduate School of Journalism at Columbia University and a bachelor’s from the College of Arts and Science at New York University. 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When buying a small business, a due diligence checklist can help you evaluate its financial statements, contracts and existing liabilities. Reviewing the legal standing of the business, including licenses and regulatory compliance, can give you a clearer picture of its viability and any potential risks. This checklist helps buyers make informed decisions, thereby minimizing surprises after the purchase is complete. A financial advisor can also help you assess the health of a business and how it fits into your overall investment portfolio. Here are 15 common due diligence steps for a checklist.

","

Financial Review

","

Review balance sheets, income statements and cash flow statements for at least the past three years. Focus ons revenue streams, profitability and overall financial health including outstanding debts or liabilities.

","

Tax Records and Compliance

","

Verify that the business is in good standing with its tax obligations by reviewing the federal taxes as well as state and local tax returns for at least the last three years. Look for any unpaid taxes, penalties or ongoing audits.

","

Legal and Regulatory Review

","

Check for any pending lawsuits, intellectual property issues or regulatory compliance matters. Verify all necessary licenses and permits. Additionally, contracts with suppliers, employees and customers should be reviewed to identify any potential legal issues post-purchase.

","

Customer and Market Analysis

","

Examine customer demographics, data analytics and marketing tests to understand the business’s market share and competitive landscape. Evaluating customer contracts or recurring revenue models can help gauge the long-term potential of the company.

","

Operational Assessment

","

Evaluate the day to day efficiency of the company. Determine if the current operational processes, including production, supply chain and inventory management can meet future demand or if more investments are needed. It’s also a good idea to identify key employees and management to maintain continuity post-sale.

","

Employee and Human Resources Review

","

Employees are an essential component of the business’s success. Assess the current workforce, including contracts, benefits and any labor disputes. Reviewing employee turnover rates and satisfaction can provide insight into the company’s culture and leadership structure.

","

Supplier and Vendor Relationships

","

Examine current contracts, payment terms and any long-term agreements the business holds with suppliers and vendors. Dependency on any single supplier could pose a risk if that relationship were to break down.

","

Intellectual Property and Branding

","

Review intellectual property rights, especially if the business owns trademarks, patents, or copyrights. Make sure that these are registered and up-to-date. If the brand itself holds significant value, preserving that reputation will be key to maintaining customer loyalty and market share.

","

IT Systems and Data Security

","

The company’s software, hardware and data management systems must be up-to-date and secure. Assess data security protocols, especially if the business handles sensitive customer information. Check for any past data breaches or cybersecurity threats that may pose risks.

","

Environmental and Safety Compliance

","

Failure to comply with environmental and safety regulations can result in hefty fines or operational shutdowns. Review local, state and federal regulations for things like waste disposal and workplace safety. Address any outstanding citations.

","

Sales and Marketing Strategies

","

Determine if the company’s marketing approach is sustainable or requires significant changes to reach its target audience. Review historical sales data, current marketing strategies and customer acquisition costs. A strong marketing plan can help increase revenue post-purchase.

","

Inventory and Asset Valuation

","

Conduct an accurate valuation of everything from equipment and real estate to intellectual property. Verify the condition of any physical assets and determine whether they require upgrades or replacements. Understanding the true value of these assets helps avoid overpaying for the business.

","

Insurance Coverage

","

Verify that the current insurance policies, including general liability, property, workers’ compensation and business interruption insurance, are adequate. Check if there are any gaps in coverage that could pose risks and make sure that policies will remain valid after the transfer of ownership.

","

Business Valuation and Purchase Price

","

Once all aspects of the business have been reviewed, it’s time to determine its true value. A business valuation will help ensure that the asking price is fair and reflects the company’s actual worth. Consider hiring a professional appraiser to assess the business’s assets, liabilities and earning potential.

","

Transition Plan

","

Finally, consider how the transition of ownership will be managed. A detailed transition plan should include communication with employees, customers and suppliers about the change in ownership. Working with the previous owner for a set period post-sale can also provide stability during the transition.

","

Bottom Line

","

","

Buying a small business is a significant financial commitment that requires careful evaluation. A due diligence checklist can help uncover potential risks, ensuring that the business is a sound investment. By following this checklist, buyers can approach the acquisition process with confidence, making well-informed decisions along the way.

","

Tips for Small Business

","$46","

Photo credit: ©iStock.com/Prostock-Studio, ©iStock.com/Jacob Wackerhausen

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\n","featuredImage":{"id":"cG9zdDoyNzA4NTY=","databaseId":270856,"altText":"A business owner looking up how to calculate accelerated depreciation.","date":"2024-12-10T16:06:25","fileSize":246224,"mimeType":"image/jpeg","modified":"2024-12-10T16:10:56","sourceUrl":"https://smartasset.com/wp-content/uploads/sites/2/2024/12/iStock-1833457389.jpg","__typename":"MediaItem"},"modified":{"datetime":"2024-12-10","readable":"December 10, 2024"},"multipleBylinesByRole":{"editedBy":{"id":"dXNlcjo5Mw==","databaseId":93,"userId":93,"avatar":{"url":"https://secure.gravatar.com/avatar/04483497dbd73f712b504e401c9c7d22?s=96&d=mm&r=g","size":96,"__typename":"Avatar"},"description":"Mark Henricks has reported on personal finance, investing, retirement, \r\nentrepreneurship and other topics for more than 30 years. His freelance \r\nbyline has appeared on CNBC.com and in The Wall Street Journal, The New York Times, The Washington Post, Kiplinger’s Personal Finance and other leading publications. 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Accelerated depreciation allows businesses to write off the cost of an asset more quickly than the traditional straight-line method. This can provide asset owners with potentially valuable tax benefits in the earlier years of an asset’s life. By front-loading depreciation expenses using accelerated depreciation, companies can reduce taxable income in the short term. This accounting technique can be particularly advantageous for businesses looking to reinvest savings into growth opportunities. Talk to a financial advisor about whether and how to apply accelerated depreciation to your financial situation.

","

What Is Accelerated Depreciation?

","

Accelerated depreciation is a method used in accounting to allocate the cost of certain assets over their useful life spans using a shorter time period than the traditional straight-line method. This approach lets businesses deduct a larger portion of an asset’s cost in the early years of its life.

","

The technique can help reduce taxes. By front-loading depreciation expenses in this manner, companies can reduce their taxable income in the initial years following an asset’s purchase, often leading to significant tax savings.

","

The primary advantage of accelerated depreciation is the immediate tax relief it provides. By reducing taxable income in the early years, businesses can improve their cash flow. A stronger cash flow can free them to reinvest in operations, pay down debt or fund new projects.

","

This method is especially advantageous for companies that need to acquire expensive equipment or technology, as it helps offset the initial financial burden. When businesses use accelerated depreciation, it can make them more attractive to investors by demonstrating a proactive approach to managing tax liabilities.

","

Accelerated depreciation’s tax advantages have certain considerations attached. For one, businesses must ensure they comply with tax regulations and accurately report depreciation on financial statements. This can be complex.

","

Most types of tangible property can be depreciated. Accelerated depreciation can be applied to buildings, machinery, equipment, computers and furniture, among other assets. However, land, inventory, personal property and some other types of assets cannot be depreciated.

","

Also, while accelerated depreciation reduces taxable income initially, it results in smaller deductions and potentially higher taxes in later years. Consulting with a financial advisor can help determine the most suitable depreciation method for a specific set of circumstances.

","

Types of Accelerated Depreciation Methods

","

","

There are several different ways depreciation can be accelerated. Choosing the accelerated depreciation method can significantly impact a business’s financial health and tax obligations. Here are four to consider:

","$59","

When to Consider Accelerated Depreciation

","

Accelerated depreciation is particularly useful for businesses experiencing rapid growth. Companies investing heavily in new equipment or technology can benefit from the immediate tax relief, allowing them to reinvest savings into further expansion.

","

This method can also be advantageous for startups that need to maximize cash flow to sustain operations during the critical early stages. However, taking more depreciation now necessarily limits the ability to take depreciation later. Businesses should ensure that their growth projections align with the depreciation strategy to avoid future financial strain.

","

Certain industries may find accelerated depreciation more helpful than others. Manufacturing and technology sectors, which often require significant capital investment in machinery and equipment, can leverage accelerated depreciation to offset substantial upfront costs.

","

Industries with rapidly evolving technology may also find this method a better match for an asset’s useful life. In this way, it can be used to ensure that financial statements more accurately reflect the asset’s value.

","

Bottom Line

","

","

Accelerated depreciation is a tool for businesses looking to optimize their tax strategies and manage cash flow effectively. This method allows companies to write off the cost of an asset more quickly than traditional straight-line depreciation, providing significant tax advantages in the early years of an asset’s life. By front-loading depreciation expenses, businesses can reduce taxable income and, consequently, their tax liabilities. In this way, accelerating depreciation can free up capital for reinvestment or other operational needs.

","

Tips for Entrepreneurs

","$5a","

Photo credit: ©iStock.com/Hispanolistic, ©iStock.com/gorodenkoff, ©iStock.com/fotostorm

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If you’re a business owner looking for a loan, your lender will be looking for your solvency ratio. Of course, if you have a startup and are new to running a business, you may not know what a solvency ratio is – but your lenders are going to be monitoring it carefully. The health of your solvency ratio will likely determine whether you get a business loan. Building business credit isn’t always straightforward but it can be important if you need to borrow to fund business activity. You can work with a financial advisor to help you create a financial plan and help put your credit on track.

","

What Is a Solvency Ratio?

","

It’s a math equation or formula that determines whether a business’s cash flow is flowing steadily enough so that the company can pay back any money it borrows. (You’ve probably heard business folks ask questions like, “Is your business solvent?” Well, a solvency ratio answers that question.)

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A lender looks at the business owner’s liabilities and assets and how the assets are depreciating and ultimately decides whether this business’s solvency ratio is financially robust or weak. If it’s strong, your business will probably get the loan and if it’s weak, it probably won’t – or the terms of the loan won’t be very good, such as your being saddled with a high-interest rate.

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The solvency ratio is an imperfect way for a lender to determine the ability of a business to pay off a debt. For instance, it doesn’t take into account an existing line of credit that you might use to pay down debt or stocks you might sell to pay off a debt. But for better or worse, lenders like to know a business’s solvency ratio.

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How to Calculate Your Solvency Ratio

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Lenders will do this when they analyze your balance sheets; you won’t have to crunch the numbers. But you may want to know how to calculate your business’s solvency ratio, so your expectations are in line with whether you’re likely to get a business loan. First, a warning that this is about to get math-heavy, but if you want to calculate it, there are four main types of solvency ratios that lenders look at.

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1. Interest Coverage Ratio

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Can your company handle the interest payments on debt? That’s what the interest coverage ratio determines.

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The math: Interest coverage ratio=EBIT/Interest Expenses. (EBIT is Earnings Before Interest and Taxes)
The answer you’re looking for: Some lenders like to see the number 2, but more prefer to see 3 or higher. For instance, if your company’s earnings before interest and taxes are $300,000 and you will owe $50,000 in interest, then your interest coverage ratio would be 6. In this case, your business shouldn’t have a problem paying off this debt.

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2. Debt-to-Assets Ratio

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Who owns what? This ratio looks at how much of your business is owned by the people your company owes money to, versus how much of the company is owned by its shareholders.

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The math: Debt-to-Assets Ratio=Assets/Debt
The answer you’re looking for: If you do the math and wind up with a 1 or less, that’s what lenders like to see. If your number is less than a 1, you have more assets than debts and your company is probably a pretty good credit risk.

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3. Equity Ratio

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How healthy is your company? It is mostly financed by equity or by debt? That’s what lenders want to know when they look for your company’s equity ratio.

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The math: Equity Ratio=Total Shareholder Equity/Total Assets
The answer you’re looking for: You’ll looking for a percentage in this case, and the higher the percentage, the better. If your math shows that you have, say, 80% or more, a lender will be pretty pleased. That would mean 20% of your company has debt. When you have 50% or less, that’s when a lender gets uncomfortable. You have a lot of debt and are considered highly leveraged.

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4. Debt-to-Equity Ratio

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How much debt are you using, to run your business, versus your own equity? It can sound awfully similar to the equity ratio, but as you’ll see, the math is a little different.

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The math: Debt to Equity Ratio=Outstanding Debt/Equity
The answer you’re looking for: You’re looking for a number lower than 1. Let’s say that your business has $100,000 in shareholder equity, and you have $30,000 in liabilities. If that were the case, you would divide $30,000 by $100,000, and you’d get 0.3. A lender would probably be pretty happy with that number.

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A Word About Liquidity Ratios

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Liquidity ratios are often mentioned in the same breath as solvency ratios because those, too, measure a company’s health and like solvency rates, there are a lot of different kinds of liquidity ratios. In a liquidity ratio’s case, lenders are looking at the company’s short-term health. Ideally, you want both ratios to be healthy and strong, but you especially want the solvency rate to look appealing.

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Lenders tend to look at liquidity ratios carefully with loans, especially if they are considered high-risk. They want to know how much cash you have on hand, to pay the loan back if you struggle to do so. Do you have cash? Inventory to sell? But, at least in theory, the lender may not care as much that your business’s liquidity ratios aren’t super strong if the solvency ratios look appealing.

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The Bottom Line

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Solvency ratios are probably not something you think about often, especially if you’re new to running a business, but lenders are thinking about them. It’s a good idea to understand them, even if you aren’t currently in the market for a loan. If you analyze your solvency ratios and discover that they aren’t in good shape, it may motivate you to improve your company’s financial health. That’s good for your business, whether you someday want to get a loan or not.

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Tips for Building Credit

","$6a","

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Picking the right business partner is crucial. If you choose the wrong person, your journey as a business owner could be much more difficult than it needs to be. On the other hand, if you can find someone who’s experienced and shares your values and goals, there’s no telling what you can achieve. As with any major life decision, do some serious thinking before you make any final business moves.

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1. Passion

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Ideally, the person you decide to partner with should be just as passionate about your business as you are. Your company might not survive if your partner isn’t willing to work hard or do whatever it takes to meet the goals you set. There’s no point in hiring a partner who isn’t going to pull his or her weight and commit to making the business one of their top priorities.

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2. Reliability

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Even if the folks you’re interviewing seem enthusiastic about becoming your right-hand man or woman, it’s best to choose someone you can depend on. A job candidate whose resume seems scattered or who hasn’t spent a full year at a single company might not be able to commit to being your business partner.

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It’s important to look out for any red flags that might indicate that the person sitting in front of you can’t be trusted to help you lead and run your company.

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3. Compatibility

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When hunting for a business partner, it’s tempting to select someone who has the same interests and hobbies that you have. While there’s nothing wrong with that, it might be wise to find a partner who’s everything you’re not. You might be able to accomplish a lot more by picking someone who has the skills that you lack over someone you have a lot in common with.

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4. Knack for Building Strong Relationships

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If you want to scale your business, you’ll need to have access to an extensive network of potential clients, investors and industry influencers. If your own social or professional circle is smaller than you would like it to be, finding a business partner who’s well-connected could be a smart move.

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5. Fiscal Responsibility

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Regardless of whether you’re opening a bakery or launching an online retailer like Etsy, it helps to know a thing or two about finance. Depending on your business needs, you might not need to find a partner who’s an accounting whiz (especially if you’re planning on hiring one later on). But at the very least, it’s best to choose a sidekick who knows how to manage money and hasn’t landed in any serious financial trouble in the past.

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6. Creativity

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The most successful businessmen and women are innovators. A good business partner is going to be someone who can consistently come up with original and fresh ideas. In order to differentiate your company from the others in your industry, you’ll need to find someone who can help you create a brand with a distinct image.

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7. Open-Mindedness

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Another quality that can be great to look for in a business partner is the ability to keep an open mind. Collaborating with someone who isn’t receptive to different ideas or perspectives could be difficult. In the worst case scenario, it could prevent your business from reaching its full potential.

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8. Tolerant of Risk

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If you’re looking for a business partner, you might need to find someone with a high tolerance for risk. You’ll probably come across situations where you’ll have to go out on a limb or make an investment without knowing how things will turn out. If your partner prefers to play it safe, you could miss out on certain opportunities or falter in the face of a challenge.

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At the same time, you might not want to hire someone who always makes major decisions impulsively. As you think about what the perfect partner looks like, it’s a good idea to consider finding someone who can strike a balance between taking risks and being cautious.

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9. Conflict Mediator and Resolver

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You and your business partner aren’t always going to see eye to eye. Conflicts are inevitable when you’re working long hours with the same person. But someone who holds grudges or seeks revenge when they don’t get their way could become more of a liability than an asset.

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10. Resilience

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As a business owner, you can expect to experience some setbacks. You’ll make mistakes as you go along and you might fail many times before you find solutions that work. But you’ll need to be able to roll with the punches if you want your business to go anywhere.

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That’s why it’s so important to find a resilient business partner who can motivate you when you’re feeling disheartened. Someone who’s going to quit when the going gets tough won’t do you or your company any good.

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Bottom Line

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A business partner can make or break a startup. If you’ve decided that you need a partner in order to turn your new business into a successful company, it’s a good idea to find someone who compliments the skills you already have and knows how to bounce back from adversity.

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Tips for Starting Your Own Business

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