Buying a Business - The Traps and How to Avoid Them - Part 1
Whether you are starting your own business from scratch, going into a business opportunity, or buying a business, you need to have certain characteristics, traits, skills, and goals in order to succeed. So how do you know if you are ready to own a business? Basically, you need to ask yourself some hard questions and give yourself honest answers. If you don’t have the time and commitment to start a business, you need to look elsewhere for your income. You may be better served accepting a job with a company. There are those that need structure and a job is the place for them. But, if you are inclined to owning your own business, then lets discuss some necessary items. First, you need to have a plan. The plan can come from your own imagination, the franchisor, or the company offering the business opportunity. It doesn’t have to be something set in stone, and it doesn’t have to be fancy. It just needs to be a basic outline of what your business will be, what you will sell, how you will sell it, and what your operating costs will be. It is recommended that you include at least three months of operating expenses into your start up costs budget, which also needs to be determined in your plan. The next item is paramount to your success. It is the infamous 4 letter word and that is work.
Lots of people have the dream of owning their own business, but they get bogged down in the details of how to go about it. While this article isn't meant to serve as a complete business start-up guide, it will give you an idea of some steps to take.1.EntitiesThe two most important professionals you will need to begin are a lawyer and an accountant. The lawyer can help you decide if you want to be a corporation, partnership, sole proprietorship, or some other type of company. A good accountant can help you make the decision based on what will be most advantageous for you from a tax angle. Your lawyer can also help you register your business and get the licenses and permits you need.2.Make a Business PlanYou need to get a business professional to help you writ a business plan. You will need one to help you get organized and to help keep your goal in mind. This could be anything from serving hot dogs to people outside your home to providing technical support. Either way, you need a plan that sketches out how to proceed and an estimate of how much money you will need. 3.Get FinancingHow much start-up money will you need? Do you have the savings? Do you have friends who would want to invest? Do you need a Loan? Whatever your plan is, you will need to present a copy of your business plan to bankers or investors if you need to loan money to get the company rolling.4.A Record-keeping SystemA good accountant can advise you on the best record keeping software for your business, and help you set up a system for keeping track of payables, receivables, sales tax, payroll, employee benefits, and so forth. You will rely on the accountant for at least your yearly return, and possibly for quarterly payroll and sales tax returns. Your accountant can also get you an EIN number (Employer Identification Number).5.LocationDepending on your business, location may be important. If you are not going to run it from your own home, location can make or break you - and the rent is due no matter which way the tables turn. You will also need to get a phone, get the utilities turned on, install your furniture and equipment, and get a sign or two.6.Accounts with Credit Card CompaniesYou will need to invest in a method for checking the validity of debit and credit cards.7.EmployeesYou may not need to do this step if you are a one-person operation. Maybe you can get by with just one part-time person to answer phones and do some paperwork. It just depends on your business. You will need to have them complete various forms for the IRS, and you may want to run a background check. 8.Promote your BusinessDecide how you will let people know you exist, what you can do for them, and why they should come to you. You may want to advertise on TV, have a radio commercial, newspaper ads, flyers, and coupons.The list might make you think twice about starting a business of your own. But, you can do it without all the headaches of traditional business. There is a very simple way of attaining the goal that has worked for millions of people. The best part of exploring home-based business opportunities is that there is little risk and the upside is tremendous. Many of the pressures of the traditional business are wiped away with the home business.
Buying a Business - The Traps and How to Avoid Them - Part 1
My occupation centers around helping business owners analyze their assets and coaching them on decisions as to whether or not they should sell all or part of their businesses. As such, I am privy to a wide variety of business information and I can tell you first hand, I tend to see a lot of bad operations. Additionally, based on my experience of having owned and operated several businesses myself, I also coach buyers on what to look for in a business and how the process of buying a business works. So it is not uncommon for me to skew to the negative side of things and to look for warning signs that could potentially hurt either party in a business resale transaction. I don't enjoy searching for the negative aspects of business, but I know them and I work hard to seek out, identify, and mitigate the impact that these risk factors may have on either party.However, I don't always find things that are bad. And during this time, with all the doom and gloom of our present economy, I thought I would share a story with you about an operator that stood above the crowd and ran an excellent business.Several years ago, before I began to specialize in the sales and acquisition of convenience stores, I worked as a transactional broker in multiple industries. One of which was the hotel and motel industry. At the time a friend of mine happened to own a boutique hotel in the Caribbean on the island of St. Croix, U.S. Virgin Islands. One day he mentioned to me that he was tired and since he had owned the hotel for several years he had decided to sell it so he could spend more time with his family. I agreed to help him and began to review his books and records. Upon initiating my review, one of the first things I noticed was that he was doing a good business...a very good business. By that I mean he was running a 90% occupancy rate and had been for several years. It wasn't like he'd just had a good year or two; he had been having very profitable years for quite some time. When I asked him how he had managed to get the occupancy rate to 90% and keep it there, he said that over the years, during the slow seasons, he would make several small changes to the property to maintain a fresh business. Every six months or so, he made sure to do something different to his hotel. It could be a new painting on the wall in the lobby or new trash containers or new towels, etc. But he would always make some change or add something new for his customers to see.When I asked him why he did that, his reply was, "My customers expect to see something new all of the time." He explained, "You see, even though a lot of my customers may be transient, many of them are not, because I work to keep them coming back to me every year. They enjoy their experience at the hotel and they want to see something different, even if it is a little thing." He also mentioned to me that when occupancy would begin to drop-off he would personally go into the town and offer air conditioned rooms to the locals for a reduced price to help fill his rooms and continue to generate cash flow.Wow, I thought. What a novel idea. He went and asked for someone's business.So I began to work at selling his hotel. I can't tell you how many interested people I had look at his hotel. Finally I found a businessman and his son from Ohio who had seen the property, met with the owner and had even gotten the accountant involved in the sale of the business. But just when I was about to write the purchase agreement the deal came to a screeching halt. The buyer said that he could not buy the business.I asked him why? Was it because of the asking price? Was there something wrong with the cash flow or the numbers of the business that did not look in order? No, it was none of those items at all. The numbers were great and the assets of the hotel were in excellent condition. The answer to why he could not buy the business still rings through my ears today as clear as if it was yesterday. He said, "I cannot buy this gentleman's hotel, because he is doing such a good job of operating it that there is no more upside left for me." He said, "I cannot begin to operate it any better than the present owner, because he has done everything right in operating the business and continues to do so even during the hard times."Astounding as it may sound, this hotel was the proverbial case of a car with eight cylinders running on all eight cylinders and doing so well that there was no more upside left in the business. The business was doing too good to be considered salable.It wasn't until some years later that I encountered this same issue again. I was contacted by a gentleman who owned about 12 convenience stores and had decided that he wanted to sell about half of them to reduce his work load. Here again when I inspected the quality of the physical assets of the stores and reviewed his books and records I discovered that I had encountered another "eight cylinder car running on all eight cylinders".The man and his team were great operators. Whenever something broke in the store or something needed replaced or maintenance on the outside, they fixed it. I could not find a blemish anywhere and most of the stores were over 5 years old. His merchandising and floor plan was laid out well and the store traffic flowed. Every time I visited a store they had merchandising specials throughout the store from different vendors. All of his stores were very profitable and operating well. I remembered the hotel in St. Croix and prepared myself for some tough sales. But I was wrong. I ended up selling all the stores he asked me to sell. I know that the people who bought those stores were happy knowing they were buying excellent running assets. And they were especially happy with the fact that all they had to do to maintain the stores success was to continue with the process of running the stores the same way that the previous owner had.So what is the moral of this story?When buying a business you always have a choice. You can buy a business that is an excellent running business and all you have to do is show up and do the same things that the last owner was doing. This would be like buying an eight cylinder car that is running on all eight cylinders.Or you can buy a business that needs some attention and some tender loving care and has more upside, but will also take more work to get the business tuned up and running well. This would be the eight cylinder car that is only running of six cylinders and needs work. In other words it is a fixer upper.Either way you go you will always generally be farther ahead than trying to start a business from scratch and doing it the hard way. So go for it. Find the business that suits your taste and then decide if you are buying a fixer upper or one you can walk in and is ready to go and begin to enjoy the journey.
Which is Better, Investing or Owning a Business?
After reading this article, you will be ready to start applying your knowledge and reach your American Dream of owning a business. This comes with a serious effort on your part; however, by reading this article, I assume you've decided to take this long journey and start making a change in your life. I'm going to introduce you to some easy ways to get the money you need through the modern-day miracle of leverage. We'll start with an approach that enables you to make the business actually pay for itself without requiring you to reach for your wallet.Question: Is it true that the method of taking money out of the company's cash flow is reserved exclusively for financial gurus?Answer: It is partly true. Most leveraging techniques have that reputation. And frankly, they shouldn't. If more people knew about them, many entrepreneurs would have been in business long ago. Such techniques only seem to be reserved for financial experts because they [the techniques] appear more frequently in strategic financial markets. You hear of many major acquisitions worth billions of dollars. Yet, you will never hear how it happened or what was involved. This information never goes public. As will be mentioned in Strategy 4, by developing a strong network with corporate leaders, you will definitely have access to that valuable information even though you might not work in the field.These are actually hidden secrets that I'm revealing to you right now. The power of information will allow you to go far. However, it's up to you to make the effort in searching for more information about the company that you want to acquire. Remember, the most powerful tool you have while you are dealing with the seller is showing him your knowledge in the industry and how it can be beneficial for him (and yourself, of course) to sell you the business. And, believe me, you too can put these powerful, yet simple, tools to use immediately.Question: What is the easiest way to explain how to use a business's cash flow for financing purposes?Answer: Let me start by giving you some perspective on how much money we're really talking about. One expert explains it this way:"The amount of cash an average business puts into its cash register over just two or three weeks is usually enough to cover the down payment to buy that business".Think about it. The cash that collects in just a matter of days is usually enough so that, with some creativity, you can use it to satisfy the seller's down payment. That can work no matter what type of business you are pursuing. Since there is no law that says you can't "borrow" that money, all you have to do is figure out how to use the cash collected to pay for the business once you have acquired it. This easy if you have a C.P.A to calculate your cash flow in order to know how to approach the seller with your proposal. Question: How does the process work?Answer: A few steps are required. You, or your C.P.A, must determine the net cash flow generated over the first several weeks of business by determining the difference between cash receipt totals and operating expenses.Question: What are the proper procedures to evaluate a business, and what should I prioritize to make my decision?Answer: There are several methods used to evaluate companies. Typically cash flow, assets, or replacement values, or a combination of these, are considered when determining the value of a company. The following lists various valuation methodologies typically used by valuation firms. Replacement Cost Analysis: o Generally, the value of a company does not relate to the value of replacing the assets of the company. Sometimes the replacement value of the property, plant, and equipment (PP&E) is far higher than the fair market value of the operating business. Sometimes the value of goodwill, such as customer relations, corporate logo, and technical expertise are far higher than the replacement value of the PP&E. You can often choose a particular industry by expanding facilities already owned, investing in entirely new facilities, or by purchasing all or part of a new company operating in the industry. The decision as to which investment to make depends, in part, on the relative cost of each. Of course, an investor will often consider capacity utilization, location, environmental, political, and legal issues among other things in determining where and how to invest. These issues may outweigh the importance of the replacement cost analysis; in such cases, this valuation method is not used to determine the fair market value of the company. Asset Appraisal Analysis: o It is generally possible to liquidate the PP&E assets of a company, and after paying off the company's liabilities the net proceeds would accrue to the equity of the company. It is necessary to determine whether such liquidation analysis should be performed assuming rapid or orderly liquidation of the assets. However, even when assuming an orderly liquidation of a company, it is generally the case that an operating company will be of substantially higher value. It is not appropriate to use the asset appraisal approach in this case because the company is operating successfully; under such circumstances, in the industry in which the company operates, the company's fair market value will almost certainly be in excess of the value of its assets on a liquidated basis. The sum is more valuable than the parts. It is appropriate to appraise non-operating assets using an asset appraisal approach to determine their value as part of the fair market value of the company. Discounted Cash Flow Analysis. o Another determinant in a company's value is the anticipated cash flow. Discounted cash flow analysis is a valuation method that isolates the company's projected cash flow that is available to service debt and provide a return to equity; the net present value of this free cash flow to capital is computed over a projected period based on the perceived risk of achieving such cash flow. So as to take into account the time value of capital it is typically appropriate to value the company's cash flows using a discounted cash flow approach. Total Invested Capital. o Each method of valuing a company or its business units places a value on the total invested capital. These various values are compared to reach a definitive fair market value. Often it is appropriate to weight the various implied values for total invested capital based on the relative effectiveness of each valuation method used for the analysis. When the value of the total invested capital has been determined, any claims to that value that have a more senior right than common stock are subtracted to determine the fair market value of common stock. These other claims include the fair market value of all debt, outstanding preferred stock, outstanding stock options, and share appreciation rights. Non-operating assets that had not been previously valued must be accounted for and added to total invested capital. These generally include cash and the fair market value of any non-operating assets. Terminal Value. o An owner may expect cash to flow to capital over an indefinite period of time. While valuation models often use predictions of future cash flows, it may be necessary to represent the value of the cash flow that can reasonably be expected to extend beyond the horizon of the projections. This value, known as the terminal value, is often calculated by multiplying the fifth year cash flow by a multiple. Selected multiples commonly use the median multiple of total invested capital to comparable companies selected in the comparable public company analysis. The selected multiple may be discounted to reflect the company's performance or size characteristics relative to comparable companies. This is quite similar to dividing the cash flow by the weighted average cost of capital and including a growth factor.Question: Well, that is all great. However, how will that help me in the purchase of the business?Answer: You negotiate a deal that enables the seller to receive the down payment directly out of the cash flow once you've taken over the company. If this sounds too good to be true, here is an example of its viability: An aspiring young entrepreneurial couple, Sandy and Kevin, wanted to buy a thriving restaurant and pastry shop in Northern Virginia. Although they were bright and energetic, and possessed some experience in the food industry, they nevertheless lacked-by a long shot-the ability to pay the $100,000 the seller wanted down on the total price of $500,000. (The restaurant's annual sales equaled $1 million, some of which came from a thriving commercial business selling its fresh roasted coffee to local gourmet supermarkets and coffee shops.)Fortunately, the seller agreed to pitch in and finance the $400,000 difference over five years at 10% interest. This happens often, especially with a good deal of persuasion. The couple's problem, however, was raising the remaining $100,000. Kevin's parents believed strongly in their son and daughter-in-law's skills and determination and decided to loan them $20,000 to be paid back at their convenience. That certainly helped, but they still needed $80,000. In order to reach this goal, the couple's C.P.A developed a cash flow statement for the first month of his clients' new ownership. Their suppliers wouldn't require any payment for a month so Sandy and Kevin would not have that expenditure. However operating expenses such as rent, payroll, and utilities had to be considered.Upon seeing the numbers from the financial analysis, Sandy and Kevin were convinced they could easily draw $80,000 from their business within four weeks. But the big question was: How could they convince the seller (who expected a $100,000 check on closing) to wait three to four weeks for his money?This is where creativity, persuasion, and earnestness were required. Strategizing with lawyers and their C.P.A, Sandy and Kevin devised a plan that enabled the seller to withhold the final papers of the sale for four weeks. During that period, they would pay the seller approximately $20,000 a week. If they missed a payment, the seller would have the right to renege on the deal. The seller agreed to this proposition giving Sandy and Kevin their American Dream for no cash of their own.This example represents over 80% of all take-over and acquisitions. In the worst-case scenario, the seller may not cooperate; in this case you should understand that he probably was never seriously interested in selling his business. It is possible that the seller was waiting to see how far you would go during the negotiating process, which brings us to the next question.
Which is Better, Investing or Owning a Business?