Balance sheet

The balance sheet is a statement of the financial position and net worth of a firm. Built on the accounting equation assets = liabilities + owners’ equity, the balance sheet is a two-columned statement with ASSETS listed on the left side and liabilities and owners’ EQUITY listed on the right side. Because the right side represents the sources of CAPITAL for the firm and the left side represents the uses of that capi­tal, the two sides of the balance sheet must always be in balance.

On the asset side, current assets are listed at the top, fol­lowed by the long-term assets. The bottom of the left side of the balance sheet is called Total Assets.

On the right side of the balance sheet, liabilities—the firm’s debt—are listed at the top, followed by the equity. The bottom of the right side of the balance sheet is called Total Liabilities and Equity. The left and right-side totals will be equal in dollar amount.

There is a physical significance to the arrangement of the right side of the balance sheet, with liabilities being listed above and before the firm’s equity. This signifies and recognizes that the firm’s creditors (represented by liabili­ties) have a priority to be paid in the event that the firm should have to liquidate (due to insolvency or bankruptcy, for example). The equity owners can receive payment from liquidation only after all the creditors have been paid in full. For this reason, the firm’s equity is often referred to as the residual equity.

The idea of residual equity is also evident in the concept of net worth. With a simple transposition of the accounting equation assets - liabilities = owners’ equity, it is evident that the equity is the firm’s net worth. When debts are subtracted from assets, the residual, if any, is the firm’s net worth.

Individuals and households can construct balance sheets, just as firms do. This is most useful if one wishes to determine his or her net worth. It should be noted that net worth can be negative when the liabilities (debts) exceed the assets. If a firm has a negative net worth, it is insolvent or bankrupt. If an individual or household has a negative net worth, the expression “living hand to mouth” describes the situation more aptly.

Business valuation

A business valuation is an estimate of the fair MARKET VALUE of a closely held business. There is no distinction between a valuation and an appraisal, but usually the term valuation is applied to estimating the value of a business and an appraisal is used to refer to estimating the value of a spe­cific ASSET, such as real estate, jewelry, antiques, or art. Fair market value, an important term in business valuation, means what a willing buyer and seller would agree upon if neither had a particular compulsion to buy or sell and both had reasonable knowledge of all the facts.

Valuations are done for many reasons. The most obvi­ous is the valuation done to assist in a genuine transac­tion, when, for example, a prospective buyer or seller hires a valuation expert to assist them in the process. But valuations are also done for other reasons. The estate tax levies a certain amount of tax on the value of property transferred to an heir, and so an estate must have a valua­tion of any family business that is inherited by the next generation. Sometimes the valuation of a family business is important in divorces. When the assets are being divided by the spouses, it is a relatively easy matter to establish a value for such things as cars and houses, but the value of the family plumbing business is a different matter. A valuation expert is important to guide the courts in the division of the assets.

In general there are three approaches used in estimating the value of a business: asset approach, INCOME approach, and the market approach. The asset approach is the easiest to understand: The company’s individual are valued, then its debts are subtracted to find an overall fair market value.

The income approach estimates the company’s future income and then uses DISCOUNTING techniques to estimate its current value. The difficulties with this approach include estimating the future income and determining an appropriate DISCOUNT RATE.

The market approach is theoretically very appealing. It compares certain characteristics of the company being val ued to companies that have been sold recently; the person doing the valuation tries to find a comparable company in the same industry, with about the same assets and income size. The difficulty with this method is both in finding a comparable company and understanding the elements of the comparable transaction, which may include other con­siderations besides the company being sold. For example, the CONTRACT to sell a comparable company may include a certain amount of work to be done by the previous owner or some special financing provision. Such things have to be stripped from the comparable transaction before it is used as a basis for valuing the business. Finding a compa­rable company and understanding the transaction makes the market approach most difficult to apply.

The American Society of Appraisers and the AMERICAN INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS have specialty designations or valuation credentials that they confer on members who accomplish certain prescribed training and testing and have pertinent experience.

buying-center concept

The buying-center concept is the idea that in businesses and organizations, many people with different roles and priori­ties participate in PURCHASING decisions. Unlike consumer buying, where the consumer, alone or with assistance or influence from acknowledged opinion leaders, makes his or her own purchase decisions, in business buying a group often determines which PRODUCTs or SERVICES are purchased.
The typical business buying center will include a vari­ety of participants:

- initiators: people who start the purchase process by defining a need
- decision makers: people who make the final decision
- gatekeepers: people who control the flow of informa­tion and access to individuals in an organization
- influencers: people who have input into the purchase decision
- purchasing agent: the person who actually makes the purchase order
- controller: the person who oversees the budget for the purchase
- users: people who use the product or service

In many situations, people play more than one role in business purchasing decisions. Sometimes, buying centers are formal committees created to make a purchase deci­sion, but more often they are defined by organizational relationships. Depending on an organization’s structure and the importance of the decision being made, there could be many or few layers of management involved in a buying center. Some members of a buying center will par­ticipate throughout the decision-making process, while others will only be involved briefly.

Marketers attempt to define who is involved in buying-center decisions. For example, in the 1990s it was often dif­ficult to determine which people made purchase decisions for business computer systems. In many organizations there was no formal computer-systems department. Often important influencers were individuals within an organiza­tion who had taken the time to learn about and analyze computers, even though it was not part of their job require­ments. Influencers were often also initiators of computer-systems purchases and upgrades but sometimes were thwarted by gatekeepers resisting changes in technology. For a marketer of computer systems, it was important to identify who played which roles in business buying centers.

Marketers have also recognized the importance of “champions”—advocates for a company’s products or serv­ices within an organization. During the latter 1990s and early 21st century, many organizations expanded the use of OUTSOURCING—contracting for specific products or services from outside the organization. The jargon term pilot fish refers to individuals and businesses created by former employees now providing outsourcing services to the com­panies they previously worked for. These pilot fish know the company’s structure and the buying-center process in the organization and depend on their champions to con­tinue to influence and send business to them.

Bylaws

Bylaws define the organizational and operational structure of a CORPORATION. In addition to the articles of INCORPORA­TION (sometimes called a charter), which state the rights and responsibilities of the corporation, bylaws provide greater definition regarding the powers of managers, SHAREHOLDERS, and the BOARD OF DIRECTORS. Jane P. Mallor et al. note that a typical set of corporate bylaws cover:

- the authority of directors and officers, specifying what they may or may not do
- the place and time at which the annual shareholders’ meeting will be held
- the procedure for calling special shareholders’ meetings
- the procedures for directors’ and shareholders’ meet­ings, including whether a majority is required for approval of specific actions
- provisions for the creation of special committees of the board of directors, defining their scope and membership
- the procedures for the maintenance of records regarding shareholders
- the mechanisms for transfer of shares of stock
- the standards and procedures for the declaration and payment of DIVIDENDs

Bylaws are the rules guiding the behavior of sharehold­ers, management, and the board of directors. Without them many disputes are likely to arise among owners and managers, and they provide greater transparency in corpo­rate business decision making. Even with well-defined bylaws, corporate disputes and lawsuits frequently arise. In the 1900s, shareholders in many companies proposed changes in bylaws, including “shareholder-rights bylaws,” which would require the company’s board of directors to “pull the pill” when confronted with a hostile acquisi­tion—that is, implementing anti-takeover actions to pre­vent another company from taking control of the company. Known as POISON-PILL STRATEGIES, shareholder-rights bylaws would direct specific action by the board of direc­tors, but many legal scholars question their legality.

Buy-grid model

The buy-grid model is a business model depicting rational organizational decision making. Business marketers use the buy-grid model to portray the steps businesses go through in making purchase decisions. The model includes two components: buy phase and buy class.

Buy phase represents the logical eight steps businesses (or consumers involved in extensive problem solving) go through

need recognition

definition of PRODUCT type needed

development of detailed specifications

search for qualified suppliers

acquisition and analysis of proposals

evaluation of proposals and selection of a supplier

selection of an order procedure

evaluation of product performance

Business-to-business marketers recognize that at each step in the buying process, business buyers have different needs, and different groups within the organization may be involved. Business marketers anticipate which step organi­zational buyers are in and attempt to provide the needed information and support for that stage of decision making. Marketers who can become involved early in the decision-making process have a greater chance of being considered in the final selection process. Many organizations, includ­ing government agencies, have formal purchasing proce­dures incorporating the buy-grid model. Set-aside programs targeting small and minority-owned businesses and bid solicitation requirements for government offices follow a similar defined procedure for PURCHASING.

Most business-buying situations do not involve all of the steps in the buy-grip model. The number of steps varies with the buy-class, the type of buying decision. There are three buy-class categories: new buys, straight rebuys, and modified rebuys. While the complete buying process is typically used for new buys (purchases of prod­ucts or services never used before), a majority of business purchasing decisions are either straight rebuys or modi­fied rebuys. In straight rebuy situations, only the need recognition (the company almost out of the product) and reordering steps are used. For business marketers it is critical for their products or services to be listed as approved vendors for straight rebuys. Marketers will use reminder ADVERTISING, relationship-building entertain­ment and hospitality, and PERSONAL SELLING to maintain their status as the preferred provider. In modified rebuy decisions (where a buyer is willing to “shop around”), the buyer may go through some or all of the purchasing steps. For marketers desiring to be considered during modified rebuy situations, comparison advertising and demonstrations are used to influence business buyers. Incumbent firms will use relationships, special offers, and anticipation of or quick response to customer needs to maintain their status when business buyers are con­sidering alternatives.