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.
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 - Steps
If you have dreamed of owning your own business then you can succeed at it. It is possible for you to be your own boss, acquire more out of life, and feel more satisfied and fulfilled every single day. Often we pursue career opportunities only to realize that we aren't fully satisfied with what we are doing. We desire more out of life but are not quite sure what it is. And it can seem as if something is missing. If you feel like you are missing something in your life then it doesn't have to be that way. Being your own boss might seem intimidating but it shouldn't be. You can actually achieve that goal in a step-by-step fashion that provides you with an opportunity to grow and excel, and then coach and teach others to do the same. Being your own boss is an amazing feeling because it puts you in control of the income you generate. It also gives you the tools and strategies to create the life you desire and deserve.When you own your dream business that means you own a business that is built around your passion and purpose, a business that allows your gifts and talents to shine, and a business that makes a difference in the lives of others. And you can become your own boss for a very affordable investment.Now it is important to understand that becoming your own boss takes a lot of work and dedication. But it is extremely rewarding. If you are willing to put in the work and stay dedicated until you manifest your desired results, then you can be a very successful business owner. Many people dream of owning a business but are not sure how to bring that dream into reality. But that doesn't have to be your story. You can launch and operate the business of your dreams and have dedicated support along the way. It is your time to get off the fence about becoming a business owner and make it happen. An abundance of hidden possibilities are waiting for you.
Buying a Business - Steps
Whether you are starting your own business from scratch, going into a business opportunity, or buying a franchise, 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. Do not get caught in the trap of thinking that; if I go into my own business that means less work. That is not the case. You will need to pour yourself into the business to get it going. The difference is that it will be worth it in the long run. The most important part of your plan, and the most often left out section, is never give up. You need to have a set backs and challenges. There will some time that you will be asking will I ever make a profit? Put your shoulders to the wheel and keep going. Keep you eye on the ball and stay to the basics that you will learn from your Mentor or Franchise leader. Businesses take time and commitment. I am not talking about the kind of commitment that the chicken makes when it offers you an egg. I am talking about the commitment that the Pig makes when you are eating ham. Many people want to own their own business so that they can have more time with their family, friends and enjoyment in life. You can earn that right by working hard and doing the basics of a proven successful system. Lets work together and find you that system. Contact me at http://www.life-athome.com
Buying A Business - The Basics