Apr
14
More and more women are taking on business ownership and management roles, gaining skill sets and perks. Experience with and utilization of the CAPEX process will help women businessowners gain appropriate equity value if they ultimately sell their business. The three steps to CAPEX decisions are: determine weighted average cost capital, determine projected net cash flow from the investment, and evaluate the project. The example used to illustrate CAPEX is a financial service practice (ABC Advisors) considering acquiring a near-retirement female advisor’s practice (Advisor X). Payout ratios are determined. In step 1, WACC is determined from balance sheet items of long-term debt, taxes, and stock. In step 2, two financing options are considered. The first option is financed and the second option is a 20% perpetual payment to Advisor X that considers Advisor X’s life expectancy, asset shrinkage, depreciation methods, expense ratios and transition project costs. Step 3 looks at the net present values and modified international rates of return for each option. Option A appears to be the better option for ABC Advisors but Option B would yield a better result for Advisor X. More women solo practitioners are urged to utilize the CAPEX process to derive more satisfactory equity value when they sell their businesses, arriving at good results for both seller and buyer.
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Chia-Li Chien
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