Which is Better, Investing or Owning a Business?
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.
I get asked this question all of the time. Mainly, this question comes from people I run into that own and operate a small business and have always done things for themselves. The business may have a few employees, own some assets and is quite profitable. When speaking with them, I always hear "I don't really have any legal problems so why do I need a lawyer? Business is good and my employees love me." Well, when I hear this, I know what I am getting into.The first thing I ask these people is: how is your business structured? LLC? Corporation? Once we determine that answer, the next questions become: Do you have an operating agreement if you are an LLC or by-laws if you are a corporation? Do you have annual meeting minutes? Seven out of ten times people respond "no" to these questions. This is why they need a business lawyer. If they are not following corporate formalities and organizational protocols and someone would sue the company, the chance of that plaintiff piercing the corporate veil and attacking the owner's personal assets increases exponentially. Another question I ask is: do you have written contracts for the work you perform and the business dealing you are involved in? About 4 out of 10 say no. Again, this is why they need a business lawyer. The handshake agreement doesn't work in today's society. Everything should be in writing, not because you can trust no one, it is because you need to protect your rights. If they don't have contracts they use or have written them themselves, you can bet that they will spend insane amounts of money to settle disputes that could have been prevented by working with a business lawyer from the start.Lastly, I usually ask them if they understand the various federal and state employment laws that govern the employer-employee relationship. Most respond with "Pennsylvania is an employee at will state and I can fire anyone at anytime." This is what I call a ticking time bomb. Yes, it is true that Pennsylvania recognizes employment at will; however, there are various laws that give employees protection from discrimination, unfair treatment, unfair wages, etc. Most of the time these business owners have no idea what they don't know and end up doing something that costs them ten of thousands of dollars to settle. This is why they need a business lawyer. So as you can see, there are many reasons to work with a business lawyer when you own a business from the start. People improperly assume that the only time they will need a lawyer is in the event that they get sued. However, a good business lawyer will help you run your business in a way that limits the reasons for which you could be sued at a fraction of the cost it will take to litigate and resolve a dispute down the road.
Buying a Business - The Best Or a Fixer Upper?
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.
Buying a Business - The Traps and How to Avoid Them - Part 1
Are you learning about Buying a Business? For most people, buying an existing business is a better option than starting one from scratch.Buying A Business is generally better than Starting a BusinessBuying an already operating business has an existing cash flow, established customer base, vendor relationships, trained employees, and an established business location.All of these critical factors are non existent with starting a business from scratch. It will take time and a lot of hard work just to get a new business of the ground. In addition you will be literally burning through cash the first year and it's safe to say you should have at least 6 months to a year of personal savings in the bank that can cover your family's expenses while your new business is developing.The choice is easy. Buy an existing business with a proven cash flow so you have immediate income.Financing a BusinessFinancing an existing business can be time consuming but it depends on the route you go. Most small business owners will carry owner financing on a percentage of the deal. So if the total deal price is $100,000, you may only need $20,000 - $40,000 as a down payment and the sellers may carry the balance. Most sellers will carry the loan for 5 years at 6% -7% interest. They may also allow you to finance the loan over 10 years but require a balloon payment in 5. You should always try and get the seller to carry a portion of the financing fist. It's the easiest method in getting a deal done. If the seller will not carry a large enough portion with your down payment then you can look at alternative financing.So how much do I need as a down payment? You should have 5% - 20% of the total purchase price as your down payment. For seller financed notes they may require up to 50% down but this will vary widely with each deal and sellers personal requirements.No Money Down loansIt is a common misconception with Small Business Loans (SBA) on how easy they are to get. First and foremost, there is no such thing as No Money Down Loans when it comes to buying a business. Even before the credit crisis they did not exist. You will need at minimum 10% of the total purchase price as a down payment to get bank financing. Most small business lenders will not loan on purchases under $100,000 - $150,000 and they have additional requirements.Personal Requirements in Financing:10% Liquid Assets as down payment (They will prefer 20%) At least 6 months experience working in a similar business or managing another business A good credit score 620 and above minimum and no recent bankruptcyBusiness Requirements in Financing:The business will need to provide at least 2 of the most recent tax returns and the current years updated Profit and Loss statement.The business will need to show it has sufficient provable cash flow after the loan debt service and the buyers personal financial requirements.If you do not meet all 3 of the personal requirements and the business does not meet it's requirements then you most likely will not receive an SBA loan and will probably be wasting your time. You should focus more of your time on either negotiating with the seller to carry the financing or find a different business.Other Financing Sources:There are a few other ways you can finance the business but it will require refinancing personal assets like real estate.What Type of Business Should I Buy?Look for a business that has some connection to types of work you've done in the past, classes you've taken, or perhaps skills you've developed through a hobby. It's almost always a mistake to buy a business you know little about, no matter how good it looks. Also, try to choose a business that you're excited by. It's easier to succeed in business when you enjoy the work you're doing. Where to Look when finding an Existing Business For SaleThe first place you should look is contact a local Business Broker. Business Brokers are professional Business Advisors, intermediary's that assist buyers and sellers in the sale of a Business and generally are paid fees by the seller. A broker will help you in everything from researching businesses for sale, negotiating the best price for the business, financing the business, incorporating your business, and much more.Although brokers are paid commission by the seller, their interest is in selling the business. Therefore a good broker will work with both the Buyer and Seller in negotiating the most favorable terms for both parties.Brokers are one of the best resources to use when Buying an Existing Business.How to find A Business Broker or Business for Sale:You can find a Business Broker by looking in your local yellow pages or online by using business for sale website like The Business Broker Journal. This site is mainly a marketplace for business brokers as a place to advertise their businesses for sale.
Buying a Business - The Traps and How to Avoid Them - Part 1