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We hope you find this arcthve useful. A subscription to The Small Business Advisor Newsletter is free. Subscribe now - it's easy! The Small Business Advisor Newsletter for December, 1996 CONTENTS Notes, tips, etc
NOTES, TIPS, etc Call your credit card company and request they delete your yearly fee. 99% of the time they will do it to keep you as a customer. Quick way to save $15-25! A great way to quickly research a business that interests you is to visit the library and review their periodical index for relevant magazines. Get current copies and scan them for ideas, vendors, marketing ideas, etc. SCORE (Service Corps of Retired Executives), sponsored by The U.S. Small Business Administration (SBA), now offers FREE counseling via email. SCORE has about 12,300 member volunteers nationwide. The SCORE program matches a small business that wants help to an experienced and trained volunteer. These volunteers share their expertise with small businesses. Find a listing of e-mail addresses at their website. The SBA (Small Business Administration) is a fantastic source of information for the entrepreneur and small business owner. Call them toll-free at 1 800 827 5722 or visit their website. POSTAGE METER. If you are spnding more than a few dollars per month or making daily trips to the post office (a real time waster!) you should consider a postage meter. We recently took advantage of Pitney Bowes free 3-month trial offer. Try it for 3-months (you must purchase the postage of course - choose anywhere between $50 and $300) and, if not satisfied, return it with no further obligation. If you keep it, the meter cost $19.75 per month and the neat digital scale another $5.00 per month. You also get four free meter resets per year. Call Pitney Bowes at 1 800 546 9397.
SO YOU THINK YOU
WANT TO BUY A BUSINESS!(c) I've been a business broker for many years and I've successfully brokered the sale of hundreds of operating businesses and franchises. But, I'm always amazed at how much potential buyers trust business brokers and sellers. I'll tell you straight out, business brokers and sellers are not on your side! In many cases the business broker is only interested in closing the deal, no matter what the consequences are to either the buyer or the seller. Remember, for a broker if there's no deal --there's no commission! No matter how nice a business broker is or how helpful he seems to be, remember it's the seller who pays the broker and it's the commission from the sale price that pays his bills. The higher the sale price, the bigger the commission. And if no sale takes place, no commission at all. If you think the broker's going to hold your hand through the process, you're absolutely right. He's going to hold your hand all the way to the bank. But don't be fooled by the nice suit and friendly smile. The more the broker can convince you to pay for a business and overlook any skeletons in the closet, the happier he'll be. Don't forget, whether or not the broker feels that you can succeed in this business or make a profit at it doesn't necessarily affect him. The only thing that affects the broker is the sale of the business and its price. There are many reputable brokers and sellers out there who will treat you in an ethical manner but you still have the problem of the fact that they represent the seller and themselves, not you. So what can you do to avoid making possibly the biggest financial mistake of your life? Get as much information as you can so that you'll know what to watch out for as you negotiate to buy a business. Don't believe anyone without checking the facts and independently verifying them. Here's some of the key things you should know about before buying an operating business. A Business is Worth Only Whatever Someone Is Willing To Pay For It! Valuing the business is not as hard as you think, but you should never rely on a broker's or seller's estimate as to what a business is worth. Remember that buying a business is fundamentally an investment and consequently the business is worth only as much as its ability to generate a profit for you based on how much money you must put into it. If you're going to work in the business as most people do, then the business should also pay you a fair wage in addition to the profit that it produces. The best way to determine a business's value is to work backwards from the available profit that a seller can prove to you. This will at least get you to a point where serious negotiations can then take place. For example, let's say that a business has a total of $100,000 pre-tax profit (proven by IRS tax returns for at least the latest full year of operation), before allowing for an owner/manager's wage. You plan to work full time in the business (and believe me, you probably will!), and a fair wage for the work if you were to hire someone to do it is $40,000. That leaves $60,000 of available profit to work with. But don't forget to allow for the income taxes that you'll have to pay on this. The taxes will probably be about $18,000 depending on the state and city the business is in, plus other personal factors (figure at least 30%). That gets you down to about $42,000 of profits left to be able to either pay off the debt you incur to buy the business or to provide you with a reasonable return on your cash investment (if you're lucky enough to have enough cash to buy the business outright!). There are many ways to work with this $42,000, but most people and organizations who lend money to buy a business, whether they are the sellers themselves or others, want to see a relatively short payoff term (let's say 5 years) and a fair interest rate on the money (let's say 10%). When you do the math to determine the value of $42,000 yearly payments for 5 years at 10% interest, the amount turns out to be about $165,000. During negotiations, you can vary the value of the business up or down fairly significantly by changing the time period used and the interest rate paid. However, this is the approximate total value of the business and a good starting point for negotiations. When I say total value of a business, I really mean total. The total value and therefore the business's selling price must include all closing costs, assets, transfer and franchise fees, etc. Remember, a business is worth only as much as its ability to pay itself off over a reasonable period of time and then to produce a profit for you. Of course, if you change the time period for payoff of the purchase price, the interest rate, the anticipated taxes, the down payment and other factors, the price you can afford to pay for the business can go up or down substantially. Most Sellers "Stretch The Truth" Or Downright Lie About Unreported Cash Sales! One of the biggest problems in the valuing of small businesses for sale is the frequent claim by the sellers that they are taking large sums of unreported cash out of the business and therefore, the "profits" won't support the asking price of the business. But "trust them" they say, the cash will be there for you! My advice is to ignore all claims of unreported cash income!! How do you know the seller is telling you the truth? If the seller will cheat the IRS, why won't he cheat you? And do you really think the seller will admit to you, a stranger, that he is committing what could be a criminal felony if he thought that it could be proven? If the business's reported sales and profits as evidenced by the IRS income tax returns don't support a reasonable asking price for the business, walk away. Find another business to buy that is run on the up and up. It's your money and time you are about to risk -- don't risk it foolishly. Always Assume That There Are Skeletons In The Closet! Other things that you must watch out for are the "skeletons in the closet." These are hidden problems that many businesses have and which may be motivating the seller to unload. You'll have to be sort of a detective to find these, but I'll list a few here so you get the idea of what to look for:
Although buying an operating business is filled with many potential pitfalls, it is still one of the best ways for a beginner to get into business. An existing operating business has a proven track record, an existing customer base, a well known name, location, marketing and sales strategy, etc. If you buy the business properly, without overpaying and not taking on any fatal skeletons in the closet, you'll have your instant piece of the American dream to be your own boss and to control your own financial destiny. Get all of the information you can to educate yourself about what to look for and what to look out for. Study the particular business that you are interested in and don't let anyone push you into buying. Tens of thousands of successful business sales take place every year and the key to a successful transaction is information and knowledge on the part of the buyer and the common sense to apply it. This article was written by Russell Lee Brown, BSEE, MBA, author of the newly published "Secrets To Successfully Buying And Selling A Business!(c) (Confessions of a Business Broker)" Copyright 1996. The book can be ordered or more information about it and the business titles offered by RDS Associates can be obtained by writing to the publisher or contacting them at rds@busopsearch.com (e-mail), visiting them at their web site at http://www.worldprofit.com/infomall/inrds.htm, or calling 1-800-363-8867. HOW TO SELECT THE RIGHT SPECIALIST FOR YOUR BUSINESS NEEDS IN 5 EASY STEPS (This information was excerpted from Arthur A. Hawkins II's book "THE Self- Employment Resource Guide" ($25). Information Research Lab 9824 Western Avenue, Suite 144, Dept.SBAdvisor, Evergreen Park, Illinois 60805. aah989@hecky.acns.nwu.edu) SPECIALISTS: consultants (including management, marketing, computer), lawyers, accountants, financial planners, stockbrokers, doctors, real estate agents, insurance brokers, etc. 1) CREATE A PERSONAL LIST OF BUSINESS PROFESSIONALS Do your homework. Define the problem, situation or opportunity. Determine exactly what you want to accomplish (make a checklist) and if there's a need for a specialist. Define the scope of the project and the amount you can spend. Next contact the people and sources listed immediately below to find out what services are available, who provides what you need and to confirm your homework. TESTIMONIALS: ask friends, relatives, associates and clients for recommendations and who they use. REFERRALS: contact trade groups, associations, business schools, chambers of commerce, etc. Also contact groups you belong to, local clubs, specialty groups (e.g., [local] American Bar Association) and the Information Superhighway- world wide web, online services, bulletin boards (bbs), computer user groups. Ask them for industry information and a list of hiring guidelines, standard rates (including fees & expenses) and recommended professionals. Now you've created a list of prospective business professionals. 2) THE THIRD DEGREE Warning: Don't just rely on the hearsay evidence of testimonials and referrals. Use your own judgment. Question both the source and those being recommended. Here's what to ask referrers and contacts: Here's (approximately)
what I need: Who
do you recommend? how highly? 4) THE FINAL CUT
Why should I hire you? Would you hire you? Can you give me a client/reference list? Can you offer me something others in your industry can't? what? How long have you been in this industry? What degrees/certificates do you hold? How did you get into this industry? Are you a member of any industry trade groups? which ones? How will I be charged? are these standard industry rates? are these your regular rates? Will you itemize all fees and expenses? Are there any hidden costs or fees? what? What information will you need? How can I contribute? What will I be required to do? When can you start/finish? Can you write up a proposal for me? Do you offer any guarantees? what? Do you mind if I verify what you say? If things go wrong, what happens? Will you put everything you say in writing?. . . 5) PLAY BALL
HOW TO GET STARTED
ON YOUR BUSINESS PLAN You know you should do one, but maybe you're having trouble getting started. One way is to talk to yourself. Keep a tape recorder going as you sit and talk to an invisible TV audience. Tell why you're starting this business. Talk about what kind of people your business will help. Tell how it is that your business is especially suited to serve this market. Go on to describe what kind of business you want to have in 5 years, how many customers, what kinds of products, services, and locations, how much cash in reserve accounts, what kind of co-workers. Then, another day, type out what you have on your cassette. Keep very wide margins. That way, as you type you can put down questions and additional information as they come to mind. Read aloud what you've written and tell a radio audience this time about your expected sales for next year. Tell them about all the actions you will be taking to generate those sales. When you type from this second cassette, you will have the first steps of your cash budget. The two cassettes together and your typed and marked-up notes give you a good running start on your business plan. If you would like to receive a free, updated checklist for business plans, just E-mail Jackie Delienne at Figtree Strategies; figtree@sccoast.net. Include "advisor checklist" in the subject line. Also visit the Figtree Strategies webpage at http://www.inc.com/users/jdelienn.html . Return to top of page - Back to Home Page - Back to Archive Index |