Kit Houses – Building a Home in Less Than One Day
January 23, 2012 | 
Author Would you believe that you could be looking at pictures of new homes in a catalog one day and just a few weeks later that one of these homes could be built for you from several boxes of materials? That is just how over 100,000 people built new homes across the United States during the period between 1908 and 1940. This offered affordable housing to people who would otherwise not have been able to own a home of their own. Also, when the boxes arrived at your door the home could be assembled and completed that day!
Many people received the Sears catalog and would look through more than a hundred different models to find the one that would suit their needs. They ranged in price from about $400 for a three room model without a bathroom to over $3,000 for a seven room home with oak doors, shutters, and a granite bath tub.
These homes were referred to as “kit houses” and were very popular during this time. Sears offered a payment plan, a cross between a credit card and a mortgage, so that people could live in the house while they were still paying for it. You could also pay extra to have a construction supervisor assist you with putting the kit together.
Other companies like Montgomery Ward and Aladdin also sold homes by mail, but Sears was the most well known and sold more than the others. This was seen as an affordable and quick way to build a house for your family. Entire neighborhoods across the United States consist of these homes. Sometimes a company needed housing for its workers and ordered a dozen or more at a time. Water and sewer lines were connected and the new neighborhood could be completed within a week of receiving the materials.
Today there are still kit homes available from many companies that specialize in them. They are primarily used as vacation homes or cabins. Many communities prohibit manufactured homes in certain areas of town because of the belief that they will bring down property values.
Sears destroyed many records over the years so it is now impossible to find all of the homes. There are people who have made a hobby of locating them and listing them as historic buildings. Many times someone currently living in a kit home is not even aware that their home is of that type.
This is another part of the history of home building across the United States. The American dream of owning a home can take on many different forms and this is just one of them.
How Much Does Direct Mail Cost?
As with any business proposition, the cost associated in a direct mail campaign is usually an important factor that is considered by advertisers before they opt for it. The cost that a direct mail advertising campaign might incur depends on a lot of variable factors ranging from the kind target list of addressees that is to be procured to the quality of paper that is used to print the advertising on.
Some of the main variables on which the cost of a direct mail campaign depends on are:
1. The list of recipients that is procured from a direct mailing list broker – The cost of such a list could vary from 20 USD per thousand addresses to around 200 USD. This is a very important factor on which corners shouldn’t be cut for the sake of reducing costs as the success of the campaign is directly linked to the kind of audience which is targeted. If the targeted recipients have no use for the particular product that the advertiser seeks to sell, then the whole purpose of the direct mail campaign is lost. For example, it won’t be a successful investment to procure a list of recipients who are singles without issues for a campaign intending to sell baby food, and baby products as most of these singles would not be interested in the product.
2. Quality of the direct mail campaign – If you intend to send out letters or catalogs that are printed on glossy paper with colorful designs and pictures on them, the cost might be much greater than a simple paper mail with printed words on cheap paper. Since most postal services charge on the basis of the size of the mail or its weight, with the costs increasing corresponding to the increase in size and weight of the mail package, it would be prudent to go in for sleek and to the point direct mail ad campaigns, that can reduce the costs considerably.
3. Postage – Postage makes up the bulk of the campaign cost but can be as low as 12.7 cents.
Direct mail marketing is a costly form of advertising campaign that can be embarked upon and yet is the most successful. The cost incurred from start to finish after considering the above factors would be anywhere between fifty cents to a dollar per direct mail. The thing to look out for is the return on the investment that you could get, even if you end up spending a lot of money on the campaign.
If on an average, a thousand mails would generate 20 leads and each of the leads significantly covers the cost of the campaign as well as generates the envisioned profit margin, then it is worth going for such a mode of advertisement. Most postal services offer reduced rates for direct mail campaign permits that allow the advertiser to cut costs on this front. The US postal service offers many direct mailing packages that a prospective advertiser could choose from, depending on his needs.
The World’s Best Kept Real Estate Secret – Medellin Colombia
For the past 40 years, up until 2007, the American press has ransacked Colombia and particularly, Medellin. But with the sound leadership of President Uribe (80% approval rating) Colombia has overcome many of its security issues and now offers possibly one of the greatest real estate opportunities of all time.
Medellin is a cosmopolitan city of 4 million people that rivals anywhere on earth in terms of beauty, climate and cleanliness. At 4200 ft altitude in a mountain valley near the equator Medellin virtually has a springtime climate every month. There are also very few bugs or insects. Thus there is no need for air conditioning, heaters, screens or bug spray. Even the poorest people here have million-dollar views. The city is very clean even in the poorest areas. There are more universities here than in Boston MA. The health care in Medellin is excellent and many people are now coming to Medellin for plastic surgery and dental work at 1/4th the cost in the US.
In El Poblado, Medellin’s most luxurious suburb, there is more high rise construction than in NYC, Los Angeles and Philadelphia – combined. El Poblado is sort of like Brentwood CA but with hills, views and more vegetation. The local populace, paisas, are extremely friendly and like Americans. The women of Medellin are the most beautiful in the world and friendly to boot. No attitudes here and they are warm and family orientated. There is no age discrimination and in fact it is an honor to socialize or date a “maduro”, a mature person.
Condominiums and homes in Medellin are cheaper than Costa Rica, Mexico, Panama, the Caribbean and most parts of South America. Quality construction with million dollar views can be had for $50-80 per square foot in the nicest part of Medellin and for less in other very attractive neighborhoods. On a comparative basis Medellin is the least expensive of any major cosmopolitan city in the world.
If one looks at what happened to real estate prices in Costa Rica and Panama when Americans began investing there 7-12 year ago, the prices went up more than 800%. For anyone who has visited all three places they will tell you that Medellin is superior in every respect. So when America discovers that the crime rate in Medellin is less than Atlanta, Baltimore, St Louis, Washington DC, Detroit, New Orleans, and other major US cities and continuing to drop, there will be new interest in discovering Medellin. There is a reason that National Geographic named Colombia as one of its top six tourist destinations for 2008.
But the real proof that the truth about Colombia and Medellin will soon be realized is that in the past 18 months there have been more than 130 positive articles about Colombia and Medellin in US newspapers, magazines and TV. This is more good news than in the previous 50 years combined. There are news archives available on the Internet where these articles and TV clips can be accessed. Between the good news and word of mouth, American visa requests in Colombia are at an all time high and growing.
Timing and location is everything in terms of successful real estate investing. Medellin’s location is second to none and the timing could not be better. Do your research and discover why Medellin is truly the world’s best kept real estate secret whether for investing, as a second home or to retire early and live like a king. It is truly an opportunity to “own a piece of paradise”.
Depreciation, Causes of Depreciation, Need for Provision of Depreciation
Life span of an asset to a business rests primarily, on the purpose of its acquisition and secondary, on its nature. An item acquired for immediate consumption or sale is a short-lived asset and that meant for prolonged use, is long lived asset, though both produce revenues. Whereas the former asset expires within one year of its acquisition, the latter asset lasts longer. Hence almost entire expenditure on a short lived asset becomes an expense and is matched against current year’s revenue.
But the position is otherwise with a long-lived asset which wears out or depreciates over a long period. Accordingly, the outlay of a fixed asset is spread over several years and annually only a fraction thereof expires. Simply, this fraction, called expired cost or depreciation, is charged against current revenues and the rest, termed un expired cost, is carried forward for future expiration.
“Depreciation may be defined as the permanent decrease in the value of an asset due to use and/or the lapse of the time.” -Terminology of Institute of Cost and Management Accountants, England
“Depreciation is the permanent and continuous diminution in the quality, quantity or value of an asset.” -Pickles
“Depreciation may be defined as measure of the exhaustion of effective life of an asset from any cause during a given period.” -Spicer and Pegler
“Depreciation is’ the gradual and permanent decrease in the value of an asset from any cause.”-Carter
Objects of making provision for depreciation
For attaining following objects, depreciation accounting is a must for every business:
(1) Recovery of cost incurred on fixed assets over their useful life so as to keep owner’s capital intact;
(2) Provision is for replacement cost on the retirement of original assets ;
(3) to include the depreciation in the cost of production to find out the correct cost of production;
(4) to find out correct profit for the year ;
(5) to find out the correct financial position through balance sheet.
Causes of Depreciation
Depreciation may be of two types :-
(1) Internal-Depreciation which occurs for certain inherent normal causes is known as internal depreciation. The causes of internal depreciation are :
(1.1) Wear and Tear-An asset declines on account of continued use e.g. building, plant,
machinery etc. such decline depends upon quantum of use of an asset. If a factory works double-shift instead of single shift, depreciation on plant and machinery will be doubled. It is obvious that such loss is unavoidable. An asset may be kept in proper working conditions
through repairs for the time being, but it can not be done so permanently: At one time the asset will become unfit for repairs, when it will no longer be suitable.
(1.2) Depletion-Some assets decline in value proportionate to the quantum of production, e.g. mines, quarry etc. With the raising of coal etc. from coal mine, the total deposit reduces gradually and after some time it will be fully exhausted. Then its value will be nil.
(2) External-Depreciation caused by some external reasons is called external
depreciation.
The causes of external depreciation are:
(2.1) Obsolescence
Some assets, though in proper working order, may become obsolete. For example old machine becomes obsolete with the invention of more economical and sophisticated machine, whose productive capacity is generally higher and cost of production is lesser. In order to survive in the competitive market the manufacturer must install new machine replacing the old one.
(2.2) Passage of time
Some assets diminish in value on account of sheer passage of time, even though they are not used e.g. lease hold property, patent rights, copy rights etc.
(2.3) Accidents
Assets may be destroyed by abnormal reasons such as fire, earth quake, flood etc. In such a case the destroyed asset may be written-off as loss and a new one purchased.
Need for Provision of Depreciation
The need for provision for depreciation arises for the following reasons:
(1) Ascertainment of true profit or loss-Depreciation is a loss. So unless it is considered like all other expenses and losses, true profit/loss cannot be ascertained. In other words, depreciation must be considered in order to find out true profit/loss of a business.
(2) Ascertainment of true cost of production-Goods are produced with the help of plant and machinery which incurs depreciation in the process of production. This depreciation must be considered as a part of the cost of production of goods. Otherwise, the cost of production would be shown less than the true cost. Sale price is normally fixed on the basis of cost of production. So, if the cost of production is shown less by ignoring depreciation, the sale price will also be fixed at a low level resulting in loss to the business;
(3) True Valuation of Assets-Value of assets gradually decreases on account of depreciation. If depreciation is not taken into account, the value of asset will be shown in the books at a figure higher than its true value and hence the true financial position of the business will not be disclosed through Balance Sheet.
(4) Replacement of Assets-After some time an asset will be completely exhausted on account of use. A new asset then be purchased requiring large sum of money. If the whole amount of profit is withdrawn from business each year without considering the loss on account of depreciation, necessary sum may not be available for. buying the new assets. In such a case the required money is to be collected by introducing fresh capital or by obtaining loan by selling some other assets. This is contrary &0sound commercial policy.
(5) Keeping Capital’ Intact-Capital invested in buying an asset, gradually diminishes on
account of depreciation. If loss on account of depreciation is not considered in determining profit/ loss at the year end, profit will be shown more. If the excess profit is withdrawn, the working capital will gradually reduce, the business will become weak and its profit earning
capacity will also fall.
(6) Legal Restriction-According to Sec. 205 of the Companies Act, 1956 dividend cannot be declared without charging depreciation on fixed assets. Thus in “Case of joint stock companies charging of depreciation is compulsory.
Distinction Between Provisions And Reserves
Reserves
1. It is created by debiting the profit and loss appropriation account.
2. It is created to meet an unknown liability, or to strengthen the financial position of the company or for equalization of dividends etc.
3. A reserve is created only when there is profit in the business.
4. It can be distributed among shareholders as dividend.
5. The reserve is created without taking into consideration the actual amount required except in the case of redemption of debentures when a definite sum is set aside.
6. Creation of reserve depends upon the financial policy of the business and discretion of its management.
7. It is usually shown on the liability side of the balance sheet as it is not a specific reserve.
Provisions
1. It is created by debiting the profit and loss account.
2. It is created to meet a known liability or a specific contingency, e.g.. provision for bad and doubtful debts, or provision for depreciation etc.
3. A provision is created irrespective of whether there is profit or loss in the business.
4. It is not available for distribution as dividend among shareholders.
5. A provision is made for a definite amount and, therefore, a definite sum is set aside every year to meet the known contingency.
6. Making of a provision is a must to meet known liability or contingency.
7. The provision is generally shown on the assets side of the balance sheet.
Distinction between general reserve and specific reserve
General reserve
1. It is created for a specific purpose.
2. It is utilized for that specific purpose, for which it was created.
3. Whether profit or no profits, it must be created.
4. It is necessary to create in order to ascertain profit.
5. It is shown on the debit side of profit and loss account.
6. Net profits are reduced because of it.
Specific Reserve
1. It is created not for any specific purpose but for meeting future contingencies.
2. It can be utilized for meeting any future loss.
3. It is created only when there are sufficient profit.
4. They are created only when there are profits i.e. they depend upon profits.
5. It is shown on the debit side of profit and loss appropriation account.
6. Only distributable profits are reduced because of it.
Reserve Fund
Profit set aside and used in the business is a reserve. But profit set aside and invested outside the business is a reserve fund. Thus, the use of the term ‘fund’ indicates
investment of reserve outside the business.
Sinking Fund
A sinking fund is a fund built up by annual contributions. The contributions are invested outside the business in readily realizable securities. Interest received on investments is reinvested in the same securities.
A sinking fund may be (i) for replacement of fixed assets or (ii) for the redemption of debentures or repayment of loan. A sinking fund for the replacement of a fixed asset is a provision. But a sinking fund for redemption of debentures or repayment of loan is an appropriation of profits. A sinking fund represents amount invested outside the business.
Distinction between reserve fund and sinking fund
Reserve fund
1. Investments are not for definite period.
2. It is created always out of divisible profits.
3. Interest received on investments representing reserve fund may not be re-invested.
Sinking fund
1. Investments are for a definite period.
2. It is not always out of divisible profit e.g. sinking fund for replacement of asset is provision for depreciation, it must be created even if there are no profits.
3. In case of sinking fund, interest is always re-invested.
Monopoly and Mortgage: Playing the Game
Remember monopoly? Remember mortgages? You know, the text that’s written when you flip your title deed. Flipping the title deed means your property is on mortgage and you’ll get money from the bank.
Sounds simple right? Wrong. There’s much more to it than that.
Here are the things you need to know about the game and how to get most out of your mortgages.
The idea of the game is to buy and rent and sell properties so profitably that one becomes the wealthiest player and eventual “monopolist”. Starting from “go” move tokens around the board according to the throw of dice.
When a player’s token lands on a space not yet owned, he may buy it from the bank: otherwise it is auctioned off to the highest bidder.
The purpose of owning property is to collect rents from opponents landing there. Rentals are greatly increased if you put houses (those little green ones) and hotels (those dreaded red infrastructures).
So your best bet in winning the game is to put the most houses or hotels in your lots. (That’s assuming you don’t land in your opponents’ lots with houses or hotels).
To raise more money, lots may be mortgaged to the bank. Here comes the tricky part. That includes deciding which lots to mortgage and how you can get the most out of your mortgaged property.
Mortgages in monopoly can be done only through the bank. The mortgage value is printed on each title deed. The rate of interest is 10 percent, payable when the mortgage is lifted. If any property is transferred which is mortgaged, the new owner may lift the mortgage at once if he wishes, but must pay 10 percent interest.
If he fails to lift the mortgage he still pays 10 percent interest and if he lifts the mortgage later on he pays an additional 10 per cent interest as well as the main value.
Houses or hotels cannot be mortgaged. All buildings on the lot must be sold back to the bank before any property can be mortgaged. The bank will pay one-half of what was paid for them.
In order to rebuild a house on mortgaged property the owner must pay the bank the amount of the mortgage, plus the 10 percent interest charge and buy the house back from the bank at its full price.
When you mortgage a property, you can use the money for anything you want to, so long as it’s legal under the rules of monopoly. The only restriction in this regard is that a player cannot pre-mortgage a property to finance its own purchase.
For example, say a player wants to purchase Boardwalk but can’t do it with his or her current assets. That player cannot say, “I’m going to buy Boardwalk by mortgaging it, and then using the money I get for the mortgage to complete the purchase.” You must own a property before you can mortgage it.
Playing the game is fun and it will give you an idea of how it is in the real buy and sell world. There are also the Community Chest and Chance spaces which players land on. Instructions ranging from winning $25 dollars to $500 dollars are given. Sometimes players even land in jail! This game is definitely a clever and amusing entertainment.
Structuring Small Business Sale Transactions
Selling a privately held business is often romanticized as face-to-face negotiations over business valuations and purchase price. Whether small or large, business transactions can be extremely complex and require a great deal of work behind the scenes. As the size and/or complexity of a transaction increases, the need for innovative structuring options also increases. Deal structure, financing, and tax management must be a proactive process that is addressed at an early stage. In many cases the Seller and Buyer often place all of the focus on the transaction price at the expense of the ‘net results’ of a business transaction. By carefully negotiating the terms and structure of the transaction, a business seller could walk away with a deal that provides a significantly larger economic benefit than a transaction that provides 100% of the proceeds at closing. For asset sale transactions, the ‘allocation of purchase price’ can become another area of negotiation after the price, terms and conditions of the sale have been agreed to by the buyer and seller. Each type of structure carries with it different tax consequences for the buyer and seller, having a material impact on the overall value of the transaction. The type of business entity owned by the seller (C-corporation, S-Corporation, LLC, Partnership, or Sole Proprietorship) in addition to whether the transaction becomes an asset sale or stock sale will have a major bearing on the decisions made in structuring the transaction to afford maximum economic benefits. The purpose of this communication is to advance a few of the techniques available in structuring small business sale transactions and to emphasize the value an experienced team brings in structuring the transaction. Asset sales of pass-through entities (LLC, S-Corp, & Partnerships) are handled very differently than stock-sales of C-Corps and it would be impossible to cover all of the structuring alternatives within this short document. Proper legal and tax counsel should be retained and the cost of these professionals is usually offset by the benefits they bring through their involvement in the transaction.
The following factors will be relevant in structuring the transaction:
1. Legal Business Entity
- LLC
- S-Corp
- C-Corp
- Partnership
- Sole Proprietorship
2. Type of Sale
- Asset Sale
- Stock Sale
3. What is being sold
- Entire business
- Partial Interest / Investment
- Inclusion of Real Estate
4. Installment Sale or component of Seller Financing
5. Who is the buyer
- Financial Buyer (Entrepreneur)
- Strategic Buyer
a. Corporation
b. Private Equity Group (PEG)
c. Family Member (Succession)
6. Plans after the sale (Short term/Intermediate/Long Term)
- Consulting Contract
- Employee Contract
- Covenant not to Compete
7. Personal Tax Situation
STRUCTURING THE TRANSACTION
1. Asset Sale / Stock Sale
Determining what is being sold, the individual assets of a business or the stock in a corporation, will be critical in determining the optimal structure of a transaction. The majority of small businesses that are sold each year are structured as an asset sale. An asset sale is when a buyer purchases all or a portion of the assets of a business (e.g., facilities, equipment, vehicles, real estate, etc) whereas a stock purchase is the purchase of the ownership shares/rights of the corporation – all assets and all liabilities of the entity are retained by the corporation and only a change in corporate ownership has occurred. The following highlights three notable differences between each method; there are many additional considerations so it is critical to consult professional advice to determine the most appropriate method.
Change in Legal/Tax Entity:
With an asset sale, the legal entity and tax identity do not transfer to the purchaser. The Buyer receives a stepped-up tax basis in the assets acquired equal to the FMV purchase price, the point from which new depreciation is started. Under a stock sale, the tax basis of the assets remains unchanged, and all of the tax attributes, including depreciation methods, tax year, corporate tax election, are preserved.
Liability:
With an asset sale, the Buyer’s liability is limited. The Buyer is purchasing some or all of the assets and has the option to identify any liabilities they are interested in assuming. Under a stock sale, the Buyer purchases the stock of the company and assumes all liabilities (known, unknown, contingent or otherwise).
Assignment of Contracts:
Most businesses have contracts in one form or another. The most common are commercial real estate leases, contracts involving business relationships, and contracts with employees. An asset sale transaction involving the assignment of these contracts requires considerably more work and has a potentially a different outcome than a stock sale. Contracts need to be evaluated to determine if they permit an assignment without consent. Should they not permit assignment without consent, third party consent will need to be obtained. In stock sale transactions, the legal entity that is the party to the contract continues, and the general rule is that the contract remains in force between the original parties. (No consent to assignment is needed as assignment typically does not occur). There are exceptions, as some contracts stipulate that a change in ownership of the business will be considered an assignment of the contract. If such a ‘change of control’ clause exists in the contract, the same issues will arise as with an asset transaction. Performing due diligence and having legal counsel thoroughly review all of the company’s contracts will be critical to determine the available options.
2. Covenant Not to Compete (CNTC)
A covenant not to compete (CNTC) is a contractual condition by which the seller promises to refrain from conducting business or professional activities of a nature similar to those of the business being sold. In a contract for the sale of a business, a reasonable value can be allocated to a ‘covenant not to compete’ which is generally enforceable provided it is reasonable and limited as to time and territory. The buyer may amortize this amount over 15 years even though the actual term of the CNTC is usually much shorter. For this reason, buyers often prefer a larger amount be allocated to tangible assets or a consulting agreement with a shorter useful life. In order to be legally binding, it is recommended that some consideration is allocated to a CNTC.
3. Consulting Agreement
Depending upon the goals of the seller/buyer and the complexity of the business being sold, the seller could be retained as an independent consultant. The consulting agreement should specify the schedule of time (days or hours involved), type of training or services provided, the length of the agreement, and compensation. This is a popular structuring method which can benefit both the buyer and seller. For example, the sales price could be lowered in exchange for a lucrative consulting contract. The buyer benefits as they pay less money up front and have the ability to deduct the payments in the year made as a business expense. The seller could benefit by receiving the compensation over a period of several years, possibly reducing the tax impact. There are additional tax related issues to the seller, pertaining to the deductibility of business expenses incurred as a consultant and potential self employment taxes, and it is therefore recommended that proper tax counsel is obtained.
4. Seller Financing / Installment Sale
It is rare for a privately-held business to change hands for an all-cash price. More common in small business sales would be to have a component of seller financing as part of the deal structure. Seller financing is a mechanism where the business owner would fund the sale of their business and/or business assets with a promissory note helping the buyer finance all or a portion of the acquisition of the business and/or business assets, which is then paid back from the business’ cash flow. This type of deal can be very flexible – the seller can adjust the payment schedule, interest rate, loan period, or any other terms to reflect the seller’s needs, business cash flow, and the buyer’s financial situation.
There are several benefits to the business owner in providing seller financing:
Maximization of Transaction Value
Few areas offer more opportunity to negotiate successfully than when it comes to the details of the financing. Many sellers actively prefer to do the financing themselves as they can negotiate the highest transaction value when offering flexible owner-finance terms. In addition, the interest earned on the promissory note will add significantly to the actual selling price. Interest rates are currently hovering at their lowest level in years and sellers recognize that they can get a much higher rate from a buyer than they can get from any financial institution.
Tax Benefits
Seller financing could be a way for the owner to defer tax on the sale of the business. If the sale complies with the IRS installment method of reporting for tax purposes, capital gain taxes could be recognized when payments on the seller financed note are received versus 100% of the gain recognized upon closing the sale. It will be important to consult a tax professional as not all assets would qualify for deferred capital gains treatment. Typically, the assets that have depreciated beyond their original purchase price, such as real estate, are eligible for installment sales, as are intangibles (such as goodwill) that are established during the course of the business.
Completing the Transaction
Seller financing can be a useful tool to complete business sale transactions that need extra financing as part of their structure. The pool of qualified buyers increases exponentially when a portion of the transaction is financed by the seller. For some businesses, carrying back a note for some or all of the purchase price may be the only way to sell the company. The credit market, as a result of the sub-prime financial crisis, is still very tight. The plentiful, easily obtainable, flexible and inexpensive credit that flooded the market several years ago has changed dramatically. Many buyers will leverage bank financing to acquire a business and the majority of these lenders will require a component of seller financing to underwrite the loan. Seller financing, in the lender’s eyes, mitigates risk as they will have the additional confidence knowing that the seller has a vested interest in the business succeeding. The seller, in this instance, will be providing secondary financing to the bank’s acquisition loan (i.e. subordinated debt) for the remainder of the price.
In the event of a default by the buyer on the seller financing note, the seller would have a number of options for recourse and the specifics will vary per transaction based upon the involvement of a primary (1st position) lender, the extent of collateralized assets, in addition to personal guarantee’s made by the buyer. The specific rights will be detailed in the security agreement that is associated with the promissory note and can involve a number of stipulations including restricting the new owner’s sale of assets, acquisitions, and expansions until the note is paid off in addition to specifying the receipt of quarterly financial statements to enable the seller to keep tabs on the business. Having an experienced transaction attorney involved in the drafting of the promissory note will be essential.
5. Earn-Outs
An earn-out provision is an excellent structuring vehicle to bridge the gap on a valuation difference between what the seller expects to receive from a sale and what the buyer thinks a business is worth. Earn-outs are contractual contingent payments in which the purchase price is stated in terms of a minimum, but the seller will be entitled to additional compensation if the business reaches certain financial benchmarks in the future. Although the benchmarks can be calculated as a percentage of sales, gross profit, net profit or other figure, an earn-out is most often based on sales (not profits) and is typically tied to increasing revenue over historical levels. An earn-out is a good way to maximize the total selling price of the business, especially if the seller is confident of future sales and the new owner’s management ability. It is not uncommon to establish a floor or ceiling for the earn-out, and in a down economy, a seller can use an earn-out provision to obtain a value closer to what the business is worth in a healthy economic climate. Earn-outs are favorable to both the buyer and seller. The seller recognizes earn-outs as payment of money predicated on the future performance of the business and is therefore in a position to potentially obtain a higher value for their business than what would be afforded in a traditional sale in the current market. Buyers, on the other hand, are attracted to earn-outs as they pay less money at the time of sale but compensate the seller based upon the future success of the business. Buyers are protected against overpaying for a business that doesn’t meet the projections or growth that the original owners expected. Furthermore, Buyer’s recognize the vested interest the earn-out creates with the seller and the shared goal in the continued success of the enterprise. Most successful earn-outs are achieved when they are limited to one or two variables based upon a solid 3-5 year sales forecast. Earn-out provisions require a greater degree of involvement by the seller, and are most often implemented in conjunction with a seller employment or consulting agreement where the seller is positioned to ensure that all of the steps are being taken to reach the goals. Furthermore, it is also important to specify in the contract the person or firm that will be responsible for managing or reviewing the books and verifying the business’s performance.
ASSET ALLOCATION
In a small business sale, the owner is selling a collection of assets, some tangible (such as inventory, vehicles, buildings, and FF&E) and some intangible (such as software, customer lists, trade names, trained & assembled workforce, patents, non-compete agreements, and goodwill). Unless the entity is a C-Corp and stock is being sold, the total transaction price is allocated sequentially based on the fair market value of the acquired assets. The Tax Code shows that assets fall into 7 different categories (asset classes) based on IRC section 1060 (Form 8594), and requires that the buyer and seller adopt and maintain a consistent purchase price allocation method for tax future calculations that will determine both the buyer’s basis in the assets and the seller’s gain or loss. In most cases, the tax impact on the individual assets sold are measurably different for the buyer and seller and therefore the negotiation of the dollar amounts allocated to each of the 7 categories becomes an important element of the business transaction.
Class I – Cash
Class II – Marketable Securities
Class III – Market to Market Assets & Accounts Receivable
Class IV – Inventory
Class V – Assets Not Otherwise Classified
Class VI – Section 197 Intangibles other than Goodwill and Going Concern
Class VII – Goodwill and Going Concern Value (Residual)
Minimizing taxes plays a major role in structuring and negotiating a business transaction. Many promising deals have fallen through because the buyer and seller couldn’t agree on how to structure the deal to minimize taxes. Typically, the seller seeks to have as much money as possible allocated to assets that would be taxed as capital gains versus assets that would be treated as ordinary income. The buyer on the other hand strives to have a larger weight allocated to assets that are currently deductible or where stepped-up assets could be depreciated quickly under IRS regulations. Particular attention should be paid to the identification and valuation of the “intangible” assets as they can be significant in negotiating terms. While Buyers are often indifferent to an allocation between goodwill and a CNTC, because Sec. 197 allows a buyer to amortize goodwill or a CNTC over the same 15-year period, they will often prefer a larger allocation to a consulting agreement which is able to be expensed in the year paid. Sellers, however, prefer goodwill & going concern allocations (capital gain treatment) over a CNTC or a Consulting Agreement (ordinary income treatment).
ENLIGN strongly advises its clients to seek independent tax & legal advice from professionals who possess an expertise in business transactions. We often find that many buyers have already completed several transactions and have a team of experienced merger and acquisition professionals in place. Conversely, we find most business sellers approaching the sale for the very first time. The resources in place for the seller traditionally are comprised of general business practitioners lacking the strong business transaction experience necessary to address the multitude of issues associated with complex business transactions. ENLIGN does not provide legal, tax, or accounting advice and, for this reason, we have developed the ENLIGN Professional Partner Program (EPPP) to enable our clients to access the expertise of experienced transaction professionals in both accounting and law practices.
How Many Payday Loans Can I Have at One Time?
The amount of payday loans you can have at any one time depends on each lender. However, most states and lenders will not allow more than two at one time. There are several reasons for this and most importantly it is to protect both the payday lender and the borrower.
When the borrower takes out a payday loan there is a set time to pay the loan back. Having more than one or two loans in the same period would place undue stress on the borrower and make it considerably more difficult to pay back. This is not good for the payday loan centers because it means the risk of default is considerably higher. There is a method of checking for how many payday loans you have out at one time and most payday loan centers will check. Not only will it protect you, but it may also keep you from getting yourself in even more debt.
If you aren’t sure what rules and regulations your payday loan center follows then simply contact them. It is easy to call or send an email and receive an answer to all of your questions. Every payday loan center has various rules they follow and in order to know exactly what you are dealing with you should evaluate their website and read all the information on that particular company. Or, give them a call and they will be more than happy to help you with your questions.
There are some payday loan centers that advertise that they don’t use teletrack to see how many outstanding payday loans you have or whether you have paid those back. You should not seek out payday loan centers like these because it could be too tempting to apply for all the loans you need and then deal with repayment later. The problem occurs in two weeks when you can’t repay the loans and find yourself in significantly worse financial trouble.
Trading and Profit and Loss Account
Trading Account
As already discussed, first section of trading and profit and loss account is called trading account. The aim of preparing trading account is to find out gross profit or gross loss while that of second section is to find out net profit or net loss.
Preparation of Trading Account
Trading account is prepared mainly to know the profitability of the goods bought (or manufactured) sold by the businessman. The difference between selling price and cost of goods sold is the,5 earning of the businessman. Thus in order to calculate the gross earning, it is necessary to know:
(a) cost of goods sold.
(b) sales.
Total sales can be ascertained from the sales ledger. The cost of goods sold is, however, calculated. n order to calculate the cost of sales it is necessary to know its meaning. The ‘cost of goods’ includes the purchase price of the goods plus expenses relating to purchase of goods and brining the goods to the place of business. In order to calculate the cost of goods ” we should deduct from the total cost of goods purchased the cost of goods in hand. We can study this phenomenon with the help of following formula:
Opening stock + cost of purchases – closing stock = cost of sales
As already discussed that the purpose of preparing trading account is to calculate the gross profit of the business. It can be described as excess of amount of ‘Sales’ over ‘Cost of Sales’. This definition can be explained in terms of following equation:
Gross Profit = Sales-Cost of goods sold or (Sales + Closing Stock) -(Stock in the beginning + Purchases + Direct Expenses)
The opening stock and purchases along with buying and bringing expenses (direct exp.) are recorded the debit side whereas sales and closing stock is recorded on the credit side. If credit side is Jeater than the debit side the difference is written on the debit side as gross profit which is ultimately recorded on the credit side of profit and loss account. When the debit side exceeds the credit side, the difference is gross loss which is recorded at credit side and ultimately shown on the debit side of profit & loss account.
Usual Items in a Trading Account:
A) Debit Side
1. Opening Stock. It is the stock which remained unsold at the end of previous year. It must have been brought into books with the help of opening entry; so it always appears inside the trial balance. Generally, it is shown as first item at the debit side of trading account. Of course, in the first year of a business there will be no opening stock.
2. Purchases. It is normally second item on the debit side of trading account. ‘Purchases’ mean total purchases i.e. cash plus credit purchases. Any return outwards (purchases return) should be deducted out of purchases to find out the net purchases. Sometimes goods are received before the relevant invoice from the supplier. In such a situation, on the date of preparing final accounts an entry should be passed to debit the purchases account and to credit the suppliers’ account with the cost of goods.
3. Buying Expenses. All expenses relating to purchase of goods are also debited in the trading account. These include-wages, carriage inwards freight, duty, clearing charges, dock charges, excise duty, octroi and import duty etc.
4. Manufacturing Expenses. Such expenses are incurred by businessmen to manufacture or to render the goods in saleable condition viz., motive power, gas fuel, stores, royalties, factory expenses, foreman and supervisor’s salary etc.
Though manufacturing expenses are strictly to be taken in the manufacturing account since we are preparing only trading account, expenses of this type may also be included in the trading account.
(B) Credit Side
1. Sales. Sales mean total sales i.e. cash plus credit sales. If there are any sales returns, these should be deducted from sales. So net sales are credited to trading account. If an asset of the firm has been sold, it should not be included in the sales.
2. Closing Stock. It is the value of stock lying unsold in the godown or shop on the last date of accounting period. Normally closing stock is given outside the trial balance in that case it is shown on the credit side of trading account. But if it is given inside the trial balance, it is not to be shown on the credit side of trading account but appears only in the balance sheet as asset. Closing stock should be valued at cost or market price whichever is less.
Valuation of Closing Stock
The ascertain the value of closing stock it is necessary to make a complete inventory or list of all the items in the god own together with quantities. On the basis of physical observation the stock lists are prepared and the value of total stock is calculated on the basis of unit value. Thus, it is clear that stock-taking entails (i) inventorying, (ii) pricing. Each item is priced at cost, unless the market price is lower. Pricing an inventory at cost is easy if cost remains fixed. But prices remain fluctuating; so the valuation of stock is done on the basis of one of many valuation methods.
The preparation of trading account helps the trade to know the relationship between the costs be incurred and the revenues earned and the level of efficiency with which operations have been conducted. The ratio of gross profit to sales is very significant: it is arrived at :
Gross Profit X 100 / Sales
With the help of G.P. ratio he can ascertain as to how efficiently he is running the business higher the ratio, better will be the efficiency.
Closing Entries pertaining to trading Account
For transferring various accounts relating to goods and buying expenses, following closing entries recorded:
(i) For opening Stock: Debit trading account and credit stock account
(ii) For purchases: Debit trading account and credit purchases account, the amount being the et amount after deducting purchases returns.
(iii) For purchases returns: Debit purchases return account and credit purchases account.
(iv) For returns inwards: Debit sales account and credit sales return account
(v) For direct expenses: Debit trading account and credit direct expenses accounts individually.
(vi) For sales: Debit sales account and credit trading account. We will find that all the accounts as mentioned above will be closed with the exception of trading account
(vii) For closing stock: Debit closing stock account and credit trading account After recording above entries the trading account will be balanced and difference of two sides ascertained. If credit side is more the result is gross profit for which following entry is recorded.
(viii) For gross profit: Debit trading account and credit profit and loss account If the result is gross loss the above entry is reversed.
Profit and Loss Account
The profit and loss account is opened by recording the gross profit (on credit side) or gross loss (debit side).
For earning net profit a businessman has to incur many more expenses in addition to the direct expenses. Those expenses are deducted from profit (or added to gross loss), the resultant figure will be net profit or net loss.
The expenses which are recorded in profit and loss account are ailed ‘indirect expenses’. These be classified as follows:
Selling and distribution expenses.
These comprise of following expenses:
(a) Salesmen’s salary and commission
(b) Commission to agents
(c) Freight & carriage on sales
(d) Sales tax
(e) Bad debts
(f) Advertising
(g) Packing expenses
(h) Export duty
Administrative Expenses.
These include:
(a) Office salaries & wages
(b) Insurance
(c) Legal expenses
(d) Trade expenses
(e) Rates & taxes
(f) Audit fees
(g) Insurance
(h) Rent
(i) Printing and stationery
(j) Postage and telegrams
(k) Bank charges
Financial Expenses
These comprise:
(a) Discount allowed
(b) Interest on Capital
(c) Interest on loan
(d) Discount Charges on bill discounted
Maintenance, depreciations and Provisions etc.
These include following expenses
(a) Repairs
(b) Depreciation on assets
(c) Provision or reserve for doubtful debts
(d) Reserve for discount on debtors.
Along with above indirect expenses the debit side of profit and loss account comprises of various business losses also.
On the credit side of profit and loss account the items recorded are:
(a) Discount received
(b) Commission received
(c) Rent received
(d) Interest received
(e) Income from investments
(f) Profit on sale of assets
(g) Bad debts recovered
(h) Dividend received
(i) Apprenticeship premium etc.
Work with a Mortgage Broker to Obtain the Best Mortgage Loan
Buying a home is a huge decision but it can help you and your family secures your futures. The best thing to do is prepare yourself first before you go to market in seek for your desired home.
Wanting to buy a home means you have the guts to buy one, you may have savings to afford purchasing a new home. But it in case, you do not have savings, you can still buy a home provided that you have to shop for a mortgage. Shopping for a mortgage is not that easy, you have to make sure you have good credit score. If you are planning to buy a home, you have to settle your credit score first. Check out your credit history and do ways to come up with a good credit score. You have to pay your bills on time so to have good credit score.
If you are planning to shop for a mortgage, you have to make sure you have a stable job, moving to new job is not the right time if you are planning to shop for a mortgage. You have to avoid purchasing quite expensive things such as car, jewelry and so on.
When seeking for mortgage, it is best to work with mortgage broker since these brokers have contacts with different lenders, so he/she can help you obtain the best loan that you need to purchase a home. But do not simply work with a mortgage broker, you have to work with the right one. You can contact several brokers and find time to interview few so to find the one that has the right expertise and experiences to help you out successfully.
Asking for recommendations from family and friends is a good idea to gain few contacts to at least 3 mortgage brokers. Certainly, your family and friends will gladly help you out.
As soon as you find the right mortgage broker, he/she will provide you will list of quotes that you can choose from. The broker can also explain to you these quotes if ever you do not understand them. You have to weigh the quotes and choose the one that best suit you. In choosing you have to think about your future expenditure, do not let yourself be doomed for plenty of years just with wanting to buy your dream home. Be realistic and practical. The mortgage broker will do the work for you; he/she will be the one who will do the deals with the lender. The broker will answer all the lender’s queries.
In applying for a mortgage, you have to wait until you gain an approved mortgage before you seek for your desired home. Having an approved mortgage is beneficial to you, since most sellers are giving priorities to those who have approved mortgage. With this, you will soon obtain the home that you want.
Eliza Maledevic Ayson
[http://floridamortgagebroker.us/]
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