Questions

How do i handle gift certificates when buying a business?

I'm helping a client purchase a business and there are a lot of gift certificates circulating. We're not sure how to handle this as the seller doesn't even know how much 'value' is circulating in the public.

3answers

Great question, this is something that can be handled with a proper deal structure involving some vendor financing.

I recently did a video about this very topic for one of my YouTube followers. Check it out here: https://youtu.be/hWm4ZQxWlEw

You basically make the vendor's outstanding gift certificates a 'currency' which can be used by the buyer to repay the vendor loan. It's a net-sum game for the seller since he's already received the cash without having to provide the goods or services.

Hope this helps. Feel free to schedule a call anytime you have a question about business transactions.

David


Answered 4 years ago

Consider adding what is called a "Goodwill" this is the proceeds of what is being paid for that is projected outside of traceable assets in the business. Your situation is not typical use for business goodwill but i think it could be easily applied as it certainly adds value to future earnings and acts as branding for your acquired business.
I would recommend coming to a consensus of ratio of sales:gifts then claimed:non-claimed from that gift ratio. Because goodwilll applies to branding and market recognition, assuming the gift certificates have aged, the goodwill value of the gift certs have low value to seller and high value to buyer (as if buying at discount). This benefits the buyer while seller still gets some compensation for sales value added to the business itself.

my most basic approach would be to
TA = Total Asset Value
CC = % of Agreed upon Circulating Certificates
GR = Going Market Rate
GW = Goodwill Estimate
NW = Net Worth = Assets - Liabilities

TA/NW = Assets - (Liabilities+CC)
GW = TA - CC
GR (what you pay to acquire) = TA + GW

my approach only, I am not an accountant, I simply have an MBA and have simply general good understanding of your situation.


Answered 4 years ago

The balance of gift certificates outstanding should be listed as an advance deposit on the balance sheet and treated as a liability until they clear - assuming the current owner recorded them properly. Then, when they clear, the revenue is recognized. Accordingly, as a liability, it would reduce the value of the business as part of owner's equity at the time of valuation and subsequent sale.

In the case where the seller does not know the value, hopefully there were records of money collected in the deposits and noted as such. That could be determined through an audit, assuming there was enough to be concerned with and a journal entry would need to be made as a liability for that amount on the balance sheet.


Answered 4 years ago

Unlock Startups Unlimited

Access 20,000+ Startup Experts, 650+ masterclass videos, 1,000+ in-depth guides, and all the software tools you need to launch and grow quickly.

Already a member? Sign in

Copyright © 2019 Startups.com LLC. All rights reserved.