Business – Page 5 – WETONG Blog

Things to Consider When Selling Your Business

Business Wizard asked:

Starting a business and making it successful encompasses a great deal of work, but sometimes it gets overwhelming and you feel that selling it is the best option for you. While the current business market is shaky with the global recession affecting everything, you still have a good opportunity to sell your business. Even if you decide to wait until the economy is in a better state, you can be preparing your business for sale. Here are some things to consider while preparing to sell your business.

1. If you have any problems within your business whatsoever try to get them resolved as soon as you can. Talk to any business partners about major decisions concerning the business and its sale, and make sure that a buy and sell agreement is in place before any sale is finalised to ensure a smooth transition.

2. Work on getting all of your financial documents up to date and as accurate as possible. This is a great way to impress the buyer of the businesses acumen, and it will help convince them that the business is worth the price you are asking for it. It’s best to be up front and honest about all aspects of your business as well. Even if there is something negative in the businesses history, not revealing it could lose the sale.

3. Be prepared to help finance the sale of your business, because the current economic conditions could keep the buyer from getting funding put into place. You can also start looking for a reliable business broker to help you in your search for buyers. They will be able to qualify the buyers for you based on their financial credibility and their ability to successfully run a business.

4. Discuss with the business broker the price you should be asking for your business. They have all of the expertise needed to help you determine a price for your business that is based on the current economic conditions, how the marketplace is moving, and how a realistic price will help you sell your business instead of leaving you out in the cold because your price is simply too high.

5. Stay in constant communication with your business broker throughout the preparation of the business for the sale all the way through to the finalisation of the sale itself. They know where to list your business for sale, who to contact and speak to during inquiries about the sale and ways to get the transaction completed in a reasonable amount of time. They will act as your representative for the buyer and they can assess the offers that come into their office. They can also help you structure the final sales transaction, and by working with them consistently you can build a trusting relationship that will benefit your business.

While waiting for the business to sell it is advisable to keep the business running as efficiently and profitably as possible, letting the business broker hand the sale for you. They are working on your behalf and by allowing them to handle all of the sales aspects for you; you can concentrate on making sure the business remains running at peak efficiency.

Whole-business Securitization Lands in Europe: Ten Lessons to Remember

Dr. Dennis Vink asked:

Introduction

The asset-backed market has grown to become one of the largest capital markets in the world in terms of size and volume. Since 1998, companies have increasingly often used whole–business securitization to refinance whole lines of businesses that frequently form a substantial portion of the assets of the parent company. In one year’s time, both the Dunkin Brands transaction (May 2006) and the Domino’s Pizza deal (April 2007) pushed about $3.5 billion of asset-backed papers onto the market. Transactions in this asset class have primarily focused on the intellectual property arena, including fast food, licensing, music, and film and drug royalties. More recently, a broader area of transactions – including London Heathrow, Gatwick and other airports – has been securitized with the help of newly created whole-business or operating-assets techniques.

Because securitization – in principle – has many advantages, many (Dutch) firms seek my advice in their attempts to answer the question whether or not they would act sensibly if they refinanced all or part of their business activities through this type of securitization. If I then ask them why they should consider this type of financing, I often receive answers related to increasing (irrelevant) accounting ratios, attracting more money, and most of all doing all this at a lower price. This may be true to a certain extent, but of course there is no such thing as a ‘free ride’ or a ‘free lunch’ in the financial market. In short, it is assumed that some sort of advantage must be gained somewhere by means of securitization compared with the more traditional alternatives that are available, such as financing through a common (bank) loan or a loan backed by a collateral (secured loan).

The decision to use whole-business securitization involves an explicit choice regarding the financial structure concerned as well as managerial involvement and control. This article aims to introduce the reader to the structural features of whole-business securitization by discussing 10 important lessons. First, the general concept of asset-backed securitization will be discussed. Next, the reader will be introduced to the terminology framework for whole-business securitization. Finally, an answer will be presented to the question how whole-business securitization distinguishes itself from more traditional areas of corporate finance.

Asset-backed securitization

Lesson 1: The definition of asset-backed securitization refers to the issuance of tradable debt papers, which are guaranteed based on a well-defined collection of assets.

Unfortunately, the term ‘asset-backed securitization’ is used differently by many, since usage is not entirely consistent. Asset-backed securitization first appeared in bank funding. Hess and Smith (1988), for example, explained asset-backed securitization in the context of financial intermediaries to manage interest rate exposure. The authors defined asset-backed securitization as a financial intermediation process, which re-bundles individual principal and interest payments of existing loans to create new securities. More recently, the term ‘asset-backed securitization’ has come to be used to refer to so-called ‘structured finance’, the general process by which illiquid assets are pooled, repackaged and sold to third-party investors. So, asset-backed securitization can best be defined as the process in which assets are refinanced in the market by issuing securities sold to capital investors by a bankruptcy-remote special purpose vehicle. This definition comprises the fundamentals of asset securitization.

Lesson 2: The objective is that only the investors in the SPV will have a claim against the securitized assets in the event of the seller’s bankruptcy: not the seller or the seller’s creditors.

Legal concepts in the area of securitization often differ, and thus have specific accounting and tax rules, including tax consequences for both sellers and investors. Common-law countries (such as Australia, the United Kingdom and the United States) for example, follow different legal rules in comparison with civil countries (most other countries). Despite fundamental differences in the legal environment, the primary objective of the SPV is to facilitate the securitization of the assets and to ensure that the SPV is established for bankruptcy purposes as a legal entity separate from the seller. In other words, the objective is that only the investors in the SPV will have a claim against the securitized assets in the event of the seller’s bankruptcy: not the seller or the seller’s creditors. Because the pool of assets is insulated from the operating risk of the seller, the SPV in itself may achieve better financing terms than the seller would have received on the basis of his own merits. This is the key driver for reducing financing costs by securitization in comparison with alternative forms of financing.

Whole-Business Securitization

Lesson 3: The element of future exploitation of the asset is a key distinction between standard securitization and whole-business securitization.

Whole-business securitization uses securitization techniques for refinancing a whole business or operating assets. You may wonder what exactly is meant by ‘whole business’, and where precisely the difference lies compared with the more usual types of collateral used in securitization transactions: credit cards or mortgages, for example. In order to make you understand whole-business securitization, its definition will be presented first. Next, the difference will briefly be explained between whole-business securitization and the more common forms of securitization as we know them today: for example the use of mortgages and credit cards.

Whole-business securitization can be defined as a form of asset-backed financing in which operating assets are financed in the bond market via a bankruptcy-remote vehicle (hereafter: SPV) and in which the operating company keeps complete control over the assets securitized. In case of default, control is handed over to the security trustee for the benefit of the note holders for the remaining term of financing.

One of the great challenges lies in defining the difference between operating asset securitization and the more common forms witnessed in securitization transactions. Consider for instance a mortgage pool. If the mortgages have been securitized, the seller (sponsor) has no further obligations towards the consumer. The mortgage has been closed and stipulations concerning future payments – to be made by the consumer – have been laid down in a contract. Simply stated, the financial institution then collects payments from the consumer for the balance of the life of the loan. In effect, the traditional classes of securitization assets are self-liquidating. By contrast, in the example in which claims on the basis of operating assets are securitized, the sponsor has an obligation to exploit the underlying assets. To offer an illustration: when a football club securitizes its revenues from the sale of tickets, the sponsor must continue to render services that allow football fans to buy their tickets at the box office. Thus, the securitization process requires permanent managerial involvement on the part of the original owner in order to generate revenues. The element of future exploitation of the asset is a key distinction between standard securitization and operating-asset securitization.

Lesson 4: The receiver has authorization to seize control over the assets of the securitized business at the loss of any other creditor.

In a standard ‘whole-business securitization’ transaction, a financial institution grants the sponsor a loan secured by a pledge on a specific set of assets. This secured loan is then transferred to a bankruptcy-remote special purpose vehicle which issues the notes. The security attached to the loan is also transferred to the SPV. Thus, ownership and control of the assets remain with the sponsor, and bondholders are only granted charge over those assets. Control is required because the owner of the assets should exploit the assets for the full term of financing. Also, the sponsor intends to repay the loan out of the cash flows generated from its business. The issuance of a secured loan in a ‘whole-business securitization’ transaction is illustrated in Figure 2.

In case of default of the sponsor, the SPV receives complete control over the securitized assets by appointing a receiver for the full term of financing. The receiver has authorization to seize control over the assets of the securitized business at the loss of any other creditor. Also, the receiver eliminates the risk of external activities of management decisions reducing the return to bondholders. This is called bankruptcy remoteness. The SPV increases the likelihood of the business being able to continue as a going concern rather than being forced to have a ‘fire sale” of the individual assets. This preserves the value of the assets securitized, which is of great importance to the investors. Whole-business securitization therefore efficiently uses the privileges of bankruptcy law offering bondholders extensive security in case of default.

A clear case of effective receivership in default is that presented by Welcome Break, the U.K.-based motorway service area operator and the first whole-business securitization operation in its segment. When Welcome Break was no longer able to meet its obligations following its weaker-than-expected operating performance in 2002, the owner was in danger – if the economy continued to slide – of landing in a situation in which the company would not be able to meet its debt obligations. The owner then made an offer to the bondholders: Class A’s were to be repaid at par (£309 million par value), and Class B’s at 55% (£67 million par value). This was rejected by the bondholders. Subsequently, after Welcome Break failed to make full payment on its loan, it was put into receivership. Deloitte was appointed administrative receiver. A few days later, the owner finally agreed to pay all classes of bondholders back at par by selling nine service stations.

Lesson 5: It is hard – but not impossible – to separate the assets legally while the sponsor still retains operating control and services these assets.

Control over the cash flows of the securitized business is established either through a sale of the assets, or through an adequate legal structure that ensures continuation of cash flows in the event of the insolvency of the borrower. This feature makes it difficult in some countries to structure a business securitization deal. In fact, it has been proven to be hard to separate the assets legally while the sponsor still retains operating control and services these assets. Under U.K. law, this difficulty has almost been eliminated by the 1986 Insolvency Act, which permits the holder of a charge over substantially all of the assets of a corporate to control the insolvency proceeds of that corporate through an administrative receiver.

Unfortunately, in the Netherlands no whole-business deals have so far been finalized that could act as an example. One of the reasons for this is presented by the role played – and the responsibilities held – by the receiver in a bankruptcy case. If it involves a bankruptcy situation, the receiver has extra powers. He may, for instance, in certain situations nullify specific obligatory juristic acts: for example if both the debtor and the third party involved knew that a bankruptcy petition had already been filed, or if the case involved collusion between the creditor and the debtor to the detriment of the other creditors. Does this then imply that such things could not occur in the Netherlands? On the contrary: France, Belgium and Germany have encountered similar problems. In these countries, a series of large transactions has recently been witnessed in which the role of the receiver and securing the pledge in default cases have been adequately and appropriately dealt with.

Lesson 6: The holder of an asset-backed bond is not affected by the non-performance of the sponsor’s other assets; an ordinary secured bondholder is.

The result of bankruptcy remoteness is that the SPV generally issues securities that are rated higher (and in many cases significantly higher) in comparison with other alternatives, such as the issuance of ordinary secured debt by the company. This is the result of the risk mitigation generated by isolating the assets from the bankruptcy and other risks of the parent company through the whole-business securitization structure. Hence, the holder of an asset-backed bond is in a position similar to that held by the holder of an ordinary secured bond with regard to the sponsor, because repayment of the bonds takes place from a defined pool of assets. The difference is that the holder of an asset-backed bond is not affected by the non-performance of the sponsor’s other assets, whereas the ordinary bondholder is.

Credit rating improvement

Lesson 7: The credit rating of a security is based on the company’s unsecured rating, but is notched up or down depending on its seniority of claim.

The rating of a company is known as its senior implied rating, or unsecured credit rating (comparable with a credit rating without any collateral). This rating reflects the corporate-wide default risk and the estimation of the firm-wide possibility to pay its obligations aggregate. This rating focuses on the company in general in its industry context, such as the strength of its management, consolidated balance sheet positions, competitive position, market prospects, and how these may change. Rating agency Moody’s, for example, generally notches (numerical rating category) securities based on the average historical loss severity rates – given their priority of claim in default of the company. Table 1 is a classification scheme consisting of 21 rating scales for three rating agencies: Moody’s, Standard & Poor’s and Fitch. A word of caution is needed here, as it is important to remember that the rating scales are inverse scales, so that spread increases as rating decreases.

Each security’s rating is based on the company’s unsecured rating, but is notched up or down depending on its seniority of claim. As expressed in Table 2, secured bonds (high seniority) historically demonstrate a 30% lower loss severity upon default than the unsecured corporate bond, resulting in a favorable (higher) credit rating (and lower spreads). Senior subordinated bonds have experienced a 40% higher loss severity, subordinated bonds 52% higher, and junior subordinated bonds (with the lowest possible seniority) show a 62% higher loss severity, all indicating a lower credit rating (and higher spreads) in comparison with the unsecured corporate bond.

Lesson 8: Standard debt is rated a maximum one or two notches above the corporate rating, whereas whole-business securitization debt-like features could realize one to six notches above the corporate rating.

Moody’s approach to rating whole-business securitization transactions is based on the same expected loss methodology it applies to evaluating the credit risk of any structured security: cumulative expected loss equals the product of default probability and loss severity, summed over all possible scenarios. To date, credit rating agencies have assigned ratings in whole-business securitizations between two and six notches above the unsecured corporate rating of the sponsor. The key driver of an increase in credit rating for whole-business securitization versus ordinary debt is the fact that the value of the assets in a securitization transaction is much better preserved, thanks to bankruptcy remoteness, in comparison with the value of the assets in an ordinary debt contract.

This will be illustrated by the following example. The unsecured credit rating of a corporate is Baa3 (value 10 in Table 1). If this company issues $75 million of debt secured by a $100 million of Baa3-rated of the company’s operating assets, the debt would be rated Baa1 (collateral as security qualifies for two notches of credit). But the credit rating agencies would rate a $50 million issuance secured by the same $100 million of assets Baal as well, despite it having a substantially lower leverage. Thus, if the $100 million of assets degrades to $60 million, investors in a $75 million issuance lose $15 million. However, had the issuance been $50 million, the investors would have received all the required principal and interest fully guaranteed. Giving the same rating – Baal – to both issuances ($75 million versus $50 million) would not seem logical given the fact that the $50 million could withstand much more asset deterioration than the $75 million issuance. In a whole-business securitization transaction, it is in fact possible to grant the $50 million issuance a more favorable rating, for example an A1-rating. This is in contrast with a standard debt contract, in which a more favorable rating is not likely to be granted. This can be explained by the fact that bankruptcy remoteness eliminates certain relevant business risks from the sponsor’s other activities: risks that cannot be completely covered in a standard debt contract.

Lesson 9: A whole-business securitization structure tends to carry a lower average cost of debt and it usually issues debt with a longer maturity, which reduces pressure on the corporate issuer to place refinancing.

Structural features in whole-business securitization are designed to decrease the moral hazard of the borrower, and to decrease potential investment conflicts between borrower and bondholder. In other words, these features mitigate the risk that the strength of the business will be impaired through mismanagement. According to Moody’s Investor Service (2002), it may be possible to achieve a rating substantially above the corporate’s unsecured rating by issuing senior classes that have significantly lower leverage than the corporate bonds of the sponsor. Standard & Poor’s (2001) states that the business securitization structure tends to carry an average lower cost of debt in comparison with ordinary debt, thanks to higher credit ratings, and it usually issues debt with a longer maturity, which reduces pressure on the corporate issuer to place refinancing.

Lesson 10: Certain kinds of business are unlikely to benefit from a business securitization transaction.

According to Standard & Poor’s (2001), borrowers whose business risk corresponds to a rating below “BB” are unlikely to benefit from whole-business securitization. This is so because their future cash flows are, by definition of the rating, so uncertain that in the opinion of the rating agency they cannot justify stretching the maturity of the debt and are not likely to support a substantial decrease in credit risk. Furthermore, certain kinds of business are not likely to benefit from a business securitization transaction. These include businesses that are capital intensive, are reliant on unique management skills, or are evolving rapidly. All of the business securitization transactions executed were business activities of which the cash flows could be accurately estimated thanks to long-term contracts and a well-documented history of stable cash flows through which the business and financial risks were considered low, or could be significantly mitigated by structural features. Also, all these companies have a well-defined source of income: rent income, for example, or contracted beer sales, catering sales on specific locations, mobile phone revenues, restaurant loyalties, clothing licenses, music royalties or gate ticket sales for popular entertainment attractions.

Conclusions

Whole-business securitization is form of financing in the early stages of development. It enables a business to set up a structure in which business and financial risks can be managed and in which the level of credit risk for the investor can subsequently be limited. Without a doubt, this represents the largest innovation in comparison with familiar standard debt contracts such as common (bank) loans with or without collaterals.

Applying such structures, however, is not without risks: witness the problems encountered in the Welcome Break transaction. A combination of too little return on investment and too high leverage damaged the sponsor to such an extent that it was ultimately forced to make repayments to the investors by winding up the business. Still, many enterprises have so far been eager to use the whole-business securitization technique in order to enjoy the advantages offered by cheaper financing in combination with longer terms.

The structure discussed here will undoubtedly evolve over time and adapt to changing market conditions. Many Dutch firms could definitely benefit from repaying their perhaps needlessly complex, but certainly expensive bank loans taken out with various lenders and from replacing them by a transparent and straightforward securitization transaction structure – witness the highly innovative and successful transactions that have so far taken place in neighboring countries. Think about airports, for example, or hospitals, motorway restaurants, entertainment parks, movie theatres or royalties paid to famous Dutch artists. And how about revenues generated by the many major football clubs operating in our country?

Research into the possibilities of setting up securitization structures, into the opportunities that will be generated and into calculating the profits to be gained by individual businesses will have to demonstrate whether this techniqes is worth applying.

References

Hess, A.C. and C.W. Smith, 1988, Elements of mortgage securitization, Journal of Real Estate Finance and Economics 1, 331-346.

Mitchell, D., 2007, Franchise feeds whole-business securitization, Asset Securitization Report (July 2).

Moody’s Investors Service, 2001, Non-bankruptcy-remote issuers in asset securitization, International Structured Finance Special Report (March 22).

Moody’s Investors Service, 2002, Moody’s approach to rating operating company securitizations, International Structured Finance Special Report (February 2).

Standard & Poor’s, 2001, Principles for analyzing structured finance/corporate hybrid transactions, Rating Commentaries (July 02).

Business Finance and Commercial Real Estate Mortgage Loan Choices

Steve Bush asked:

Even though longer-term business finance techniques might be appropriate for many circumstances, there are some important short-term business loan options that will be less costly in producing improved credit card processing and commercial mortgage results for business owners. Short-term business financing choices can be misunderstood because of a preference by many business owners for long-term commercial real estate loan and commercial loan programs.

Two Important Short-Term Business Finance Options

Two of the most overlooked short-term working capital business loan strategies are short-term commercial mortgage loan programs and business cash advance programs in conjunction with credit card processing. Both of these business finance options are relevant for most business owners but are frequently misunderstood.

Short-term Programs for Commercial Real Estate Investment Financing

A long-term business loan is appropriate for many businesses that own commercial real estate investment property. Business properties should normally be financed with a combination of short-term and long-term business finance funds. When a longer-term commercial mortgage is viable, it is preferable to secure long-term business financing, preferably for 30 years.

However there will be many commercial mortgage loan situations in which longer-term real estate business financing is not appropriate for the business owner. In such circumstances it is important for a business owner to realize that there are viable short-term working capital management options.

When a Short-Term Commercial Mortgage is Appropriate

If a business owner plans to sell or refinance their business within a few years, it is preferable to explore short-term business finance options. The best short-term business loan will have minimal prepayment penalties in comparison to terms commonly included with long-term commercial real estate investment property financing.

The avoidance of business finance prepayment fees and lockout fees fees in some short-term business financing programs is an important benefit of these short-term commercial mortgage approaches. The absence of these potential fees could produce a savings of up to 20% or more if the business property is sold during the period which would have involved lockout fees in a longer-term commercial loan.

Short-Term Commercial Real Estate Investment Property Financing Limitations

There are some trade-offs that need to be understood if a business owner chooses shorter-term business financing even though prepayment fees will usually be avoided with a short-term business loan. When short-term commercial real estate financing is a realistic option, the loan-to-value will usually be no higher than 70%, the commercial mortgage will not be readily available for special purpose business investment properties such as golf courses and the interest rate will frequently be in the range of about 12%.

Best Investing Possibilities for a Short-Term Commercial Mortgage Loan

Warehouse, multi-family, office, mixed-use and retail business properties are the best possibilities for short-term business financing. Business owners should be comfortable with a time period of less than three years for a typical short-term business loan.

Fewer Mortgage Lenders for a Short-Term Commercial Real Estate Loan

There will typically be a very small number of commercial real estate investment property lenders who are effective at implementing the short-term commercial mortgage loan strategy properly. There are also a number of problems to be avoided with a short-term commercial real estate loan, so choosing an appropriate provider is extremely important to any business owner considering a short-term business finance program.

Credit Card Processing and Business Cash Advance Programs

For any business that accepts credit cards as a method of payment, a business cash advance is a critical working capital management tool that is often overlooked. Even thriving businesses frequently need more working capital than they can borrow. One of the least-known business finance strategies for successful businesses is potentially the single best working capital loan strategy for obtaining needed cash for growing their business: the use of a merchant cash advance or business cash advance program.

Primary possibilities to take advantage of this business financing program are service and retail businesses. This credit card processing and credit card financing strategy uses credit card receivables to determine the amount of a merchant cash advance.

Working Capital Management: Credit Card Financing and Credit Card Processing

This business financing technique is called credit card financing or credit card factoring. Some business owners might have used a business finance technique referred to as receivables factoring to sell future receivables at a discount and receive immediate cash.

Many service and retail businesses cannot document business receivables to obtain a business loan. Businesses such as bars and restaurants do not typically have receivables to use for business financing.

What these businesses do have in many cases is documented sales volume and documented credit card sales activity. It is this documented level of sales volume and credit card sales activity that becomes a financial asset to the business and its business finance strategies. Business cash advances from $5,000 to $300,000 can usually be obtained based on a merchant’s sales volume and future credit card sales.

A business financing merchant cash advance must usually be paid back in less than 12 months. For business owners that want to renew the working capital cash advance program, it is typically possible to get more working capital after payback of the initial advance.

Limitations and Problems to Avoid with Credit Card Processing and Merchant Cash Advance Programs

As with any successful business finance strategy, there will typically be only a small number of commercial lenders who are effective at implementing this working capital management strategy properly. There are also a number of problems to be avoided with business cash advance programs, so choosing the appropriate provider of this commercial financing service is extremely important to any business owner considering a credit card financing program.

I’m A Small Business Owner, How Can Outsourcing Help Me?

Wharton Business Foundation asked:

Many of our clients have been able to build their businesses successfully as a direct result of outsourcing. One of the most common jobs that they outsource is appointment setting. If your company does any type of outside sales (and most do) having an outsourced telemarketing department is ideal. Think about it, if you tried to hire telemarketers in house, you have to set up office space, get office furniture, get special phone lines installed, get computers, etc. You even have to either manage them yourself or hire someone else to make sure that they’re showing up on time, working their agreed upon shift, calling properly, reading the scripts properly and performing the way that you want them to.

Yet when you outsource your appointment setting, all you do is have your sales force (or yourself) show up to prescheduled appointments and write up deals. That’s it! No trouble no hassle no headaches. All of this for an employee that costs around $5 per hour.

As a small business owner, you can also use virtual assistants to contact your existing clients and cross sell them on additional products and services (a very successful and profitable strategy). In addition, they can serve as an answering service when you’re out of the office, handle your billing / payments & collections, perform accounting and bookkeeping and more. Some mortgage companies use outsourced workers to call homeowners and sell them mortgages over the phone.

Realtors use virtual assistants to help them run their offices. Their reps help them prepare documents, upload listings, answer phones, do internet marketing, send out client newsletters and more. Other businesses have outsourced reps handling some of their marketing functions. These include internet marketing. There are over 50,000 free classified ad sites on the internet other than Craigslist. Some business owners have their outsourced marketing reps posting ads on these sites each month. They also design their print and internet ads, launch their direct mail campaigns, fulfill information request orders, perform E-blasts, perform “Live Chat” for their website, perform search engine optimization, blogging, writing and posting articles online, updating their website monthly, and much more. Some accounting companies even have outsourced reps doing their clients bookkeeping (unbeknownst to their clients). Other companies have outsourced reps doing actual sales entirely over the phone and internet.

So as you can see, there are a tremendous amount of ways that you as a small business owner can benefit from outsourcing. The ways we mention above are just a few examples yet the possibilities are endless.

How to Appraise a Business

Willard Michlin asked:

There are many different ways to work out the value of a business. For the small to mid-size business, there are 3 main approaches that are used more than others. These are the Income value, Market value and the Asset value.

In brief, these would be described as follows:

Valuation based on income: One is looking at the potential earning power of the business into the future. Past earnings, expected future growth, owner’s compensation adjustments, and specific risk factors, such as customer concentration, weak management and lack of diversification are all taken into account when income based valuations are used.

Market Valuation: This method of valuing a business is similar to the way one values a house when selling it. What is being looked at here is what the market will pay for the business in question. Basically, one collects information on the sale of comparable businesses within the industry that the business is in. “Rule of Thumb” information is just a summary of many businesses sold with a million variations not being taken into consideration.

With both income valuations and market valuations, we will determine two different price multipliers. One is price divided by gross sales and the other is price divided by earnings. The applicable price multiple is selected primarily on the profitability of the business. For example, a business with high profits would have a higher price multiple applied to it. A business with low profits would be assigned a lower price multiple. When using this approach, one gets a more accurate result when one uses a minimum of at least a dozen comparables of similar type businesses.

Asset valuation: This valuation procedure assumes that a business is worth the fair market value of its tangible (physical) assets plus its intangible assets. Then from these total assets, liabilities or debts are deducted. To value a business that has intangibles, several methods are used. The method that is most employed in this area is the 5-step excess earning calculation. We will not go into the details of how this is done; we are only explaining that there is a method and giving a quick explanation. Do not try to use this method without taking classes or seminars training you in the details of this procedure. IBBA has classes on this subject.

This calculation deals with tangible assets, intangible assets, liabilities and adjustments thereof, to arrive at an estimated value for the business. It figures out what the reasonable return, on the assets, of the business, should be. If the profit is greater, than that number, it is an indication that the business has some intangible assets, which are generating the excess profit.

If the company in question is making little or no money then there will be no intangible assets. When this is the case, the asset valuation method is usually used. This is the case because when a business has capital tied up in equipment and other tangible assets the other valuation methods will come up with a price way below the actual asset value, without considering any good will. Goodwill is not considered because there is no goodwill, when the income method shows low profit. It is understandable that even if a business is making no profit or even loosing money that the seller still wants to get at least what the equipment is worth. That is why this method is used.

The Basic Steps of Valuing A Business

Valuing a business has several basic steps. These steps, when done in this exact sequence, result in a valuation of a business that can be sold. The steps are as follows:

1. In order to do any business evaluation we need to establish two numbers. Gross income-regardless of what the financials report and Total Owners Benefits. To do a quick appraisal, for the purpose of getting a listing, we only need the last full year and the current year to date. Then one does an “add-back” sheet based on the Profit and Loss statement (or tax return) to get a preliminary Owners Benefits. It is important to keep in mind that we do not want to spend hours interviewing sellers and filling out forms, at this stage.

2. In order to market a listing, after the seller has signed up, you need to have the Adjusted Net Income of the business for each of the prior two years plus the “year to date” of the current year. This is done exactly as covered below in “How to Work Out Cash Flow /Net Income”. Note: In some cases, financials for body shops will not be available. In the case of body shops, you can still do the valuations. Simply collect the Gross Annual Income and the Total Owners Income and Benefits regardless of how earned and proceed with the valuation as below.

3. Getting various preliminary value based on the “Rule of Thumb” section of the Business Reference Guide and Common Sense. This guide is written and edited by Tom West and published by the Business Brokerage Press. These numbers need to be taken with a light view since everything is given in ranges. “Rule of Thumb” ideas are a starting point, not a hard and fast rule.

An example of how the values are determined, for an Optical Practice, form the “Rule of Thumb guide, is as follows:

a. Determine what sort of business you are doing the valuation for. In this case an Optical Practice.

b. Look up Optical Practice in the index at the back of the guide and turn to the page indicated.

c. In this case you will see that the “Rule of Thumb” guide for an optical practice (in the 2003 guide) is “68% of annual sales”. This is the only valuation method covered in the guide.

d. Based on the above, if the annual sales were $350,000.00, then the valuation of this business would be $350,000 X 68% = $238,000

4. When using the Business Reference Guide for thumbnail valuations you are getting a range of opinions. Do each one separately and see what the result is. These work best when a company is making $250,000 net income (including add backs) or more annually. The smaller the business is the more you go to the lower numbers in the range for practical valuation purposes.

5. Very small businesses, making less than $100,000 net profit, have to be looked at differently. A capable individual can get a 40-hour per week job earning $50,000. That is only $25.00 per hour worked. This is assuming he doesn’t get paid vacation, holidays and medical insurance. As an owner he will work more than 40 hours and this rate will drop accordingly. If a business is making a small profit, then the first $50,000 needs to be looked at as a salary. In truth, “Rule of Thumb” valuations are totally worthless for businesses making less than $50,000 per year in total owner’s benefits.

The question that comes up here is: Why would anyone buy a job at 3 or more times what he could earn by just simply working for someone else? An individual might possibly buy a job for 1 years’ income, because it has the potential of increasing, and he or she gets to work without a boss. If a business is making $100,000 profit, someone would possibly pay 2 times net profit, for the 2nd $50,000 and $50,000 for the first $50,000. This would give a value of $150,000 for a business profit of $100,000.

We are still talking about buying a job at this level, just a better job. Maybe someone would pay $200,000 to earn $100,000 if the potential really looked good. That would be $50,000 for the first $50,000 and 3 times the next $50,000.

6. A business making $250,000 or more looks more attractive even after you deduct $75,000 for a working owner or manager. A buyer might be willing to pay as much as 4 or 5 times for the remaining $175,000 in profit, because his salary is already covered.

7. If a buyer needs to tie up a fortune in inventory then the desire to pay more for the business reduces. Sometimes a buyer pays for the inventory and wants the business for free, especially if it is making less than $50,000 for a working owner.

Judgment: There is some judgment involved in valuing a business. The guidelines above will help you take the financial figures and apply some workable judgment to them.

8. If the valuations done as explained above are within 10% of each other, or if you only have one valid valuation figure to use, after completing the 6 steps above, the valuation is easy.

9. If you have more than one valuation figure and they are NOT WITHIN 10% OF EACH OTHER, do the following, while taking into account the various judgment factors involved in valuing a business:

a. Use the adjusted net income valuation figure

b. If you cannot get a real adjusted net income figure, then use the annual gross sales figure valuation.

10. If you were using several valuation methods, you would tell the seller what the various methods are; what value was arrived at with each; and your final conclusion along with why you reached that conclusion. The “why” part would be based on the various judgment factor and valuations figure that you arrived at from the above ways.

11. You would then ask seller what price he or she would like to list the business for. Our final conclusion would be the number used as the listing price, unless the seller disagreed and wanted to use another figure. We take the sellers listing price but make it clear what the value of the business is and “why that value” in the client notes.

12. Remember, we advise the seller what the valuations are, but take his or her listing price, only if the seller insists on it.

The Comparable Method

It can sometime happen that, even with the different methods outlined above, a business can be difficult to value. When this occurs, we still have the Comparable Method that we can use.

Kismet Business Brokers is a member of http://www.bizbuysell.com and as such we have access to the “For-Sale Comparable Calculator” on the website. This calculator uses the BizBuySell database of 1000’s of sold businesses to perform its analysis. The Calculator can be used to develop a suggested asking price by simply entering the businesses gross income and/or cash flow.

How to Work Out Cash Flow /Net Income

There is a very specific way that cash flow / net income is calculated. The following is how it is done. When net income or cash flow is asked for we use the “owners benefit” figure. This is the net profit on the P & L (profit and loss statement) plus the owners benefits added back. The owner’s benefits are added back because everything one single owner gets, regardless of its form is not considered a business expense and is added back as profit. Note: Any cash that the owner receives and doesn’t report is considered an owners benefit and must also be added; it is labeled other income.

This is calculated by marking the letter “A” beside each of the following items if they show on the P & L. These items are marked and added to the calculation sheet attached. The items are:

Depreciation and Amortization, IRS Taxes, Franchise Taxes, Interest Expense, Donations, Non-Recurring Legal Expenses or Non-essential expenses. Other Expenses, Owners Medical, Life Insurance for Owners, Pension Plan contributions for owner’s family, Non-Essential Salaries, Health insurance (owner’s family portion), Owners vehicle expenses (lease payments, operating expenses, repairs, gas, depreciation and insurance), Magazine subscriptions, Owner’s Travel, Entertainment, Home office expenses and Home telephone expenses. Any other owners benefit that the seller has hidden in some expense account. Real examples include: a) Personal clothing listed as uniforms. b) Family eating out listed under entertainment. c) Children’s education listed under staff training.

Additional clarification on lease payments is as follows: As discussed in the prior paragraph, lease payments made on personal automobiles are not a business expense and are added back. The buyer many times needs to assume a lease payment on leased machinery. If the lease has a $1.00 buy out or any buy out at the end for less than fair market value of the machinery it is called a financing lease. We treat them like a loan payment and add back 100% of the payments and the seller must pay these loans off or the escrow needs to deduct the balance due from buyer’s cash requirement. We also put these assets on the balance sheet. If the buy-out at the end of the lease, at fair market, on the date of the buy-out, then this is a real lease which is really just a rental agreement. The payments are left as a business expense and are not added back. To find out which kind of lease the seller has will require asking the seller or his accountant.

In order to know how much of the financial reports is “owner’s benefits”, it is required that you go through the financials, with the client, and ask him or her to tell you which expenses should be considered personal benefits. You do not need to take the clients opinion as truth; it just needs to make sense. If it doesn’t, do not use it as a benefit.

If the company is a corporation or LLC, mark as with a “B”, the Owners Salary-husband and wife on the P & L statement and put these numbers on the add-back form. . If the business is a partnership or a sole proprietorship we only add-back the “owners/partners draws” amounts if they show up as an expense on the P & L. These salaries and “owner draws” are of interest only if located on the profit and loss sheet. Do not take salary or draw figures off of the balance sheet. The basic decision in adding back salary is this – Add back only one owner’s salary. Other partners or family members salary that will have to be replaced when the business is sold cannot added back. An explanation of what is added back should be included in the business summary.

Finally, where there is other income, this figure is gotten from the owner and added in the “Other Income” section on the attached calculation sheet. Ask the business owner if there is other income or cash that should be noted, get the figure, verify it as much as possible by having the owner supply information that proves the figure is real and how it is calculated. Write it down on the calculation sheet.

Note: Kids salaries are not added back unless they do not work in the business, or they do work in the business and their salary is much more than a non-family employee would be paid. In this case add back, as a separate item – mark it “C”, and put just the excess portion of their salary on the attached calculation sheet. All figures above are annual figures. The attached calculation sheet is used to calculate the various “add backs”. When completed, it is paper clipped on top of the Profit and Loss for the year being worked out.

Also, there are adjustments that reduce the net income of a business. These go under “Other Expenses.”

If the owner of the business also owns the real estate, the P & L will sometimes not properly reflect a fair market rent. Fair market rent is what the landlord/business owner wants from the buyer in rent. Adjust the rent, up or down, on the worksheet, for the difference between the market rent and what shows on the P & L. Property taxes are not an add back because the tenant is usually responsible for the property taxes regardless of who owns the real estate.

Three different adjusted net income work sheets are done, for each business. These are each of the prior two years plus the “year to date” of the current year. “Year to date” is an accounting phrase that means from the first day of the seller’s tax year to the last date available. If that is the 6-month period from January to June then that is the “year to date.” In conclusion, if you have Profit and Loss Statements for 2003, 2004 and 6 months of 2005, you would do an ad-back calculation sheets for the 2 full years of 2003 and 2004 and a 6 months ad-back calculation sheet for the first half of 2005

Finally, add back sheets are signed by the seller to confirm that the add backs are accurate.

What to does the broker or licensed agent do if the seller will not sign the financials as adjusted by us after all corrections are made?

After the finances have been corrected to the seller’s satisfaction he or she may still not wish to sign them. In this case, the following steps are taken:

1) Ask the seller what adjustments would need to be made for him to be able to sign the corrected finances. Advise him that it is essential that we have the financials signed, as they are his report to the buyer as to the financial state of the business. Make the final adjustments and get the signature(s) of the seller(s).

2) If the seller removed the “other income” from the financials, collect the following information so that we can sell the business that is not showing all the income:

a. How much will the seller carry back and at what terms and for how long?

b. Get a statement showing how well he and his family is surviving from the business and what it costs them to live. What they pay for housing, utilities, children’s education, and other expenses will show what it takes to support the family.

Below are the blank “add-Back” sheet and owner confirmation sheet that are used in calculating cash flow and getting seller confirmation of the figures

OWNER’S CASH FLOW ANALYSIS (ADD BACK SHEET)

NAME OF BUSINESS ______________________________________________

For Fiscal Year Ending ______________ 20 _____

Interim Period: Thru __________________________ # of Months ______

Information Source: Tax Returns () Financial Statements ()

NET INCOME FROM OPERATIONS: $______________

(A) ITEMS

Depreciation and Amortization (Except Business Autos)

IRS Federal Income Taxes or Penalties:

State Franchise Taxes or Penalties

Interest Expense

Interest portion of auto lease payments where it is a financing lease.

Donations

Life Insurance for Owners

Pension Plans contribution for owner’s family

Health insurance for owner’s family

Unusual Legal Expenses or Bank overdraft fees

Personal auto lease payments

Auto repair for owner or family auto

Gas for owner or family auto

Insurance for owner or family auto

DMV License for owner or family auto

Travel, clothing

Entertainment

Home telephone expenses

Home office expenses

Other (Name)

(A) TOTAL: $_________________

(B) ITEMS [take only numbers from P & L – not balance sheet]

Owners Salary (If Corporation or LLC)

Owners Draw or Partner #1 “Draw”

Owner #2 or Partner #2 “Draw”

(B) TOTAL: $_________________

Owner’s wife or kids salaries (If not working in the business)

Owner’s wife or kids salaries [excess portion] (If working in the business and getting much more that non-member staff

OTHER INCOME: $_________________

OTHER EXPENSES:(A) (Plus or Minus) $_________________

OTHER EXPENSES:(B) (MINUS) $_________________

ESTIMATED CASH FLOW: $_____________________

Seller confirmation of add backs:

OWNER’S CASH FLOW ANALYSIS

“This information is being provided to buyer, by Kismet Business Brokers, as information received from the business owner for such purposes.

The business owner declares that the information herein is based on figures supplied by the owner and that owner intends that Kismet Business Brokers and prospective buyers rely on such information. Owner further declares the owner has documentation supporting such figures and agrees to provide supporting documentation upon request.

Kismet Business Brokers has not independently verified the information provided herein. Further, buyer(s) are advised to obtain appropriate counsel from legal, accounting and other professionals concerning the purchase of this business.”

Business: _____________________________________________

Business Owner’s Signature: __________________________________________________________

Date: __________________________

Start Your First Business in an Incubator!

Andrew Van Valer asked:

Entrepreneurialism is alive and well and most likely happening in all around you right were you live, or if you are lucky it’s happening on your own kitchen table! Proof of this, is the 79 Million Americans who plan to start their OWN businesses in the next 3 years according to Forbes Magazine. You might be surprised to find that some of the greatest minds in American business today are investing in the future of home based businesses as their next phase – Personal Franchising. And while Personal Franchising is growing with exciting new concepts and brands, there is another side of the home business market that is underappreciated yet equally very important and that is leveraging your Personal Franchise into an incubator of a larger business model.

Both Donald Trump and Robert Kiyosaki recommend starting a Personal Franchise in their latest book “Why We Want You to Be Rich”. Trump and Kiyosaki BOTH say that if they had to do it all over again, they would build their fortunes in THIS industry. Industry influencers include a spectrum of the who’s who:

Warren Buffet purchasing companies last year like Pampered Chief

Richard Branson starting Virgin Cosmetics

Donald Trump promotes ACN

Oprah offered a large section in her O magazine to women who sell direct thru the home

The Good, the Bad and the Ugly in regard to the current-home based network marketing business

· The bad – Less than 1 out of 1000 people in this industry will ever make a six figure income.

· The bad – 90% make less than $10 a week. Why is this?

· The ugly – 90% of all business WILL fail within their first 5 years according to Entrepreneur Magazine.

· The good – Over 30, Million (yes million) Americans have either attempted Network Marketing or are currently involved in the industry. This gives the traditional non-business owner exposure to his/her own business.

Why is the perception of this industry one of easy-riches when in reality it appears most are failing? Just a couple of points might help explain the figures.

· Most people are introduced into an opportunity not as a business to build, as one would a traditional business, but instead as a way to get their products at a “wholesale” price.

· Many people jump into a business with no research on the business or firm understanding of what it takes to meet the criteria of the opportunity and match those to their goals.

· Many people do not have the motivation or goal setting objectives to be successful in ANY business and may find their comfort level more appropriate to the structure of working for someone else.

· They were presented with an inflated view of unrealistically attaining short term riches and material wealth very simply and quickly. They look beyond the work it will take to get there and in their hastiness to sign on don’t ask the right business questions. Unfortunately it seemed early on that it was acceptable for the industry to sell at such a superficial level.

Now the tough numbers start to make more sense. Many of them never intended to have a business in the first place!

What if success was far more attainable? What if you could find a high level of success in a Personal Franchise and use it as a springboard to starting your own business from the ground up or what we refer to as green fielding a business? Here’s what often happens with motivated and well educated Personal Franchise owners. The owner is building his or her business, finds some room for innovation, revolutionizes a business practice or sees other opportunity that compliments their current business and decides to start a side business. What makes their odds much better at starting their new business is their success with their Personal Franchise business. They learned business management techniques, they learned how to listen to people’s needs, how to build them up and how to sell. They also discern what people want to hear vs. what is unimportant information that wastes their time, so their efficiency as a business owner is far greater.

So while the opportunity is substantial to take your business to a higher level, getting started at the Personal Franchise level is the right place to begin your business journey. Why? Simply because the business management exists already, the marketing plan is established, your support network and best practices are well established and your infrastructure is managed so you don’t have to. This provides a more essential experience of selling and marketing your business which is where many traditional businesses fail when they overlook those key areas. So many business owners are working IN the business that they are not working ON the business. They are hiring people; they are dealing with regulatory issues, manufacturing and facility issues, etc. Sales and marketing needs, while absolutely critical to their business, falls to the back of the list so that high dollar expenditures can be handled first. And of course, business 101 tells us that no sales, equals no revenue and no revenue equals no business.

With Personal Franchising you buy into the right to distribute an established brand, using their business systems and infrastructure. Your critical mass is focused on introducing your business to buyers and other Personal Franchisees so you can build your organizational strength. With a narrowed focus and elimination of operational distractions, your success will be more assured. The formula is simple – strong output of effort and a strong team along with a proven business program, will insure your success. Any deviance from this program and you fall into some of the statistics we pointed out earlier. The reward can be substantial, and like any traditional business your effort is your biggest asset.

So what key elements would you need to be successful in a Personal Franchise?

First you will need to find YOUR solution through the same pattern for success that has worked since the start of time. What is that pattern?

1. Find your passion

2. Find a legitimate business opportunity associated with that passion

3. Find a TEAM that will truly help you build your business

What are your chances of finding all three at one time? The chances are good if you have the right tools to evaluate that which drives your passion and helps you translate that into the RIGHT business opportunity. Next, in order to achieve complete success, you will need to find a team that is wholly dedicated to the common good of the entire team and willing to leverage the strongest skills of each team member. When the synergy of the team is achieved, and three people are moving the business forward as one, that is where substantial revenue momentum exists. Like all great businesses, the success of your business depends on the quality and drive of the talent in the team.

Leverage our 30+ years of collective experience to learn partnership strategies which will help you succeed. We will help you focus on the most important elements of your business and how to avoid the mistakes commonly made that take people of the road to success. All of a sudden, instead of this being a money game, you are building something you can stand behind and be incredibly proud of, using a marketing system that actually works based on teamwork and passion!

Think about it! What are YOUR chances of success if you were able to solve most of the variables and leverage the success of every entrepreneur that went before you? Rarely in life do you have that kind of information presented to you. Most people seek the answers, but live a life of painful experience to find what others already know. The knowledge is at your fingertips; increase your odds of success. Go find YOUR Passion, YOUR Business, Your Team, YOUR mentor! Go to: www.cashflowpotentials.com

Business Consulting Services

MatthewHopman asked:

A Business Consulting Service can provide one of the best solutions any business person that is trying to achieve business success. A consulting service can help provide a platform for the people running or looking to start their own business. Their goal is to enjoy the luxury of more free time and with more work satisfaction.

If you are trying to start a small business or you have one going already you will know that one of the major reasons why people people start this kind of business is to have more control over their finances and their time. These are the major reasons now days the people have started to quit their regular job to start their own business to work less with more comfort and of course to be the boss of their own business.

Business Consulting Services help many people to develop successful business with proper guidance and innovative ideas for the growth of business. Business consultants can help to lay the foundation stone for any successful business and provides the entrepreneurs the correct way to build his or her business. To be a successful entrepreneur one has to understand the proper methodologies like how the business should run, how to attract customers, provide customer satisfaction services, maintaining good relationship with customers etc. These are few of the important factors that govern the success of any business taught by the Business Consulting Services.

One can note down from the statistics about the business failing to grow and succeed is majorly due to non-consistent performance of the entrepreneurs and their strategy involved in the growth of business. They don’t follow any Business Consulting Services guidelines which can result in many shutting down their business due to bankruptcy. The majorities of people start business of their own to enjoy the freedom and luxury of earning more in less time being boss at the same time but end up on the losing note. For instance one may take into account the scenario faced in counties like Australia and New Zealand where 40% of the business started every year come into a stagnant and precarious condition. So, its easier and more prudent to follow the Small business coaching solutions and Business development solutions in order to enhance the prosperity of the business in the right direction.

Nowadays the Business Consulting Services provide business development solutions with programs providing guidelines and techniques to develop small-scale business into Large successful business units. The business development programs like E-Myth Consulting provide the platform for small business to turn into world-class firm. They indeed provide excellent private business tuition to guide the entrepreneurs to turn the small-scale business into an excellent revenue generator. These tutors provide essential business solutions to the entrepreneurs step by step for generating fruitful revenues for the success of the small-scale business. Thus Business Consulting Services thus indeed provide step-by-step solutions to establish a small-scale business to turn into enterprise scaleable standards.

In order to meet the stiff competition of business the entrepreneurs needs to maintain standards to thrive in the market to generate the revenues. Thus business-coaching solutions are provided by the Business Consulting Services to build a successful business from small-scale business firm, to generate profitable revenue, tips and trick to love and enjoy the business one is engaged and lots of other factors that determine the success Of the business.

Buy an Existing Business – Pros and Cons

Bill Henthorn asked:

The cost of a new business vs. an existing one

Starting a business from scratch is usually far less expensive than buying an existing business. This is the biggest factor between these two choices. There are many reasons to buy an existing business. If money is not a limiting factor, then buying a business that is successful makes more sense that starting one from the get-go. One of the most important reasons for buying an existing company is they are established and the company has a monthly cash flow. The existing business enjoys a following of customers, which means immediate money coming in through the cash register. This one fact helps to offset the higher cost of an existing business vs. starting one up. Another factor is a new business has to do a great deal of advertising to let a potential customer know they are open and where they are located. The existing business does not need to do this kind of advertising.

Success chances of a new business vs. an existing business

A new start up business is far more likely to fail than an existing business with a successful history. The reason for failure in most cases is lack of cash flow and gross under financing. An existing business will have cash flow and a customer base, which will allow it to survive. A new start up business has neither of these critical elements. In addition the start up in many cases has little ready cash for waiting out the start up period and all of the expenses of getting a new business off the ground.

Given a choice, purchasing an existing business is far more likely to be the better investment. A start up while attractive due to lower beginning investment has a greater chance of failure. These considerations should be taken into account by a person looking to own a business

Reasons not to go with an existing business

A startup business is less expensive than buying a business that is up and running. When you buy a company that has been around for a while, you assume the reputation of the business. You will have to live with the good will it has generated over time. If the good will has been slipping, then be prepared to spend some money letting the public know the company is under new management. In any event it is good to let the world know that new people are running the company. If your idea for the business is an offshoot of the current business, then you may or may not be better off starting fresh with a new company. If your business plan fits with the existing company then that should be the way to go. If they are contrasting or completely incompatible then a new start up is the way to own you new business life. Do not let your ego get in the way and lead you into a start up situation. There is absolutely no reason to feel that an existing business is less brave.

A reason for buying an existing business is you may be able to get the old owner to help you learn the ropes if it is a new experience. Many owners of startups are fearful they might fail at running a business so they try to take the less expensive way to try managing a company. This is not a valid reason but somewhat of a cop out.

Which situation will cost more in advertising dollars

A start up will need a great deal of early publicity to attract customers to the business. This is required as the location, the name and what you are doing is not known when you first open your doors. This type of advertising is far different than what you would do with an existing successful company. You might want to show the public that new management has taken over the existing company.

A new company that never existed before will need to spend money on TV, radio and newspaper ads to attract customers to the new establishment. They will have to repeat the ads in order to get their message across so the customer will give them a try. In some ways this expense could be considered part of the initial cost of the new business.

New business employees

An existing business will have employees who know their job and are very likely to be responsible for the overall success of the business. Any company is only as good as the people who work for it. A successful business has gone through the shake out period of finding good employees. A start up business needs to find employees and this takes time to develop a good staff. This adds another critical factor to the start up time of the first year or so. A new owner cannot do everything by himself or herself. They will need help from their family or need to hire it in. If the business is new to the new owner as far as experience, this start up time also requires a very quick learning curve.

Customer base

The customer base has to reach critical mass in order for the business to grow and stay successful. An existing business will have developed a base of customers. A new start up has very few customers when the doors are first opened. The problems for both situations are different and need to be addressed. An existing company will need to maintain its existing customers and then try to add to that number. As long as the standards that allowed the company to get where it is are continued, the base should remain stable. If there is a fall off in the work or treatment, the customer base could begin to erode. This is not uncommon when a new inexperienced owner takes charge. The wise new owner will make every effort to not let this happen. A start up business has no base and needs to grow one as quickly as possible. A sizable customer base will automatically generate cash flow for the company.

Without this luxury, a new business must get new customers the hard way, one at a time. There are very few referrals in a start up business’s early months. This is a significant difference between an existing business and a start up business. The new owner of an existing business would be wise to spend the time on meeting all of the important customers of the company. If the old owner would take the time to make the introductions, that would be even better.

Conclusions

If money is not a consideration, then an existing business is the way to go. The odds are definitely in the favor of new owner of an existing business. The start up is the way for a less financed person to own a business. It will be more difficult to make a go of it, but it can be done. A good idea and a great deal of hard work can make it successful. Study your situation and compare the pluses and minuses for a business that you want to own. If you cannot find one for sale on favorable terms then you may be forced to start from scratch. In either case, you will end up with a different kind of boss. The boss will be you.

Selling your Business – What’s Involved

Willard Michlin asked:

The statistics on businesses sold in California are well worth knowing. Over 70% of all businesses on the market, are not sold. Why is this?

The two strongest reasons for failure are lack of preparation and an unrealistic selling price. Valuing a business correctly tends to resolve the unrealistic selling price problem. Know when to hold the price and when to change the price also helps businesses sell quicker. But, what about the preparation points?

Lets discuss the various factors that can help you get fully prepared when selling your business.

The decision to sell – People decide to sell their businesses for many different reasons. My experience shows that the main reason is because of a failed goal or purpose, of some sort. Sellers are not happy when he or she has not been making it to their satisfaction or their original goal has not being achieved. Another truly legitimate reason is if a business owner’s health is going down hill. Lastly, sometimes it is just time to retire, and play golf or travel. Whatever your reason, it is important to identify exactly what the reason is that you want to sell your business, and to be totally honest with yourself and others on this point. The reason you might be selling does not adversely affect the selling price, but it may help the marketing activities, for the agent and make the final negotiations go easier. People really like to understand why a seller wants to get out, and they are perceptive if you are lying on that point.

How to sell it – The next part of being prepared, is to make the decision to “sell it yourself,” or use a business broker. The main advantage in selling the business yourself is that you save on the commission. Brokers, usually charge 10% of the sales price for businesses priced at less than $1 Million Dollars. This can seem like a lot of money but it isn’t. If you do the marketing yourself, you would have to cover all cost of advertising the business and take all the time necessary to talk to every inquiry. Have you looked at what an add costs in the Los Angeles Times? Imagine putting in an advertisement every week for 6 months. You could take your wife on a first class cruise around the world for that much money. (Sorry Norman Chandler.)

The advantages in using a broker are many. Brokers have established marketing lines that allow them to offer your business to lots of people, in a short period of time. They know the market and are well versed in all the potential pitfalls involved in selling a business. They handle all costs associated with marketing and packaging the business and they are only paid if and when the business sells. No legitimate brokerage asks for upfront fees. You need to decide, are you going to sell it yourself or use a competent broker? I did say a competent broker; there are both good and bad brokers as in any business.

Who you should not try selling it to – When people think about selling their business, they often think of selling it to their competitors or employees. This is actually not a good idea. A competitor’s value of your business is based entirely on advantages they would be achieving, if you were not in business and therefore not hindering the expansion of their business. They look at what the net effect would be if they owned your resources (clients, territories, inventories, etc.)

Also, competitors historically are only willing to buy a similar business, for 20-33% of the price that an outsider would pay for your business. This is because the insider knows the headaches of your business and discounts the price because of them. Also many competitors will appear to be interested in buying your business, as a way to find out trade secrets. Many times they never had any real interest in buying your business at all.

Employees, when buying a business from their employer do like the idea of all the perks of ownership, but in truth, they do not like the responsibilities and potential liabilities that come with ownership. A really big problem is when employees know that a business is for sale; they usually start looking around for a new employer. I really cannot say this strongly enough. When selling your business, it is not a good idea to go to your competitors and / or employees, as a starting point.

Things that will help with the sale – A part of being prepared is to have your accounting records up to date, available and complete. This will make it much easier to get started on selling the business and to close a deal quicker. Try to put together the following before you start;

a) 2 years of profit and loss statements for the business

b) The most recent twelve to eighteen months of sales – listed by month

c) List of all equipment, with estimated market value as used equipment in place, not at fire sale prices.

d) Current list of inventories – if any

e) Copies of any property lease, equipment leases and other business related documents, such as current health department certificate as in the case of a restaurant, or OSHA spray booth permit.

f) List of all perks you personally get out of the business (these, added back into the financial reports, increase the profit figures for the business, thereby making the business more valuable).

g) A brief description of the business; what it does; the area it covers and the future expansion possibilities.

Changing the way you keep your accounting records – If you are one of the few people who do not keep accurate books, then today is the day to change your record keeping. If you are writing off everything in the world against your business, you do not need to change that action in order to sell your business. Just be able to pick out those items that a buyer wouldn’t incur if they bought the business and be able to give this information to a buyer or broker. The more important change that is needed is to take 100% of all sales and services and get them deposited in the bank and recorded as sales. If you are unwilling to do this for tax reasons, I understand. This is critical to getting the highest price. Declaring all your income, also allows you to sleep better, knowing that you are keeping books that you can show any buyer or any government official. If you feel that recording all income will also raise your income taxes, then stop worrying. There are some very good accountants around who know how to save taxes legally. If you cannot find one, I will find one for you.

Negotiation and flexibility – One of the reasons some brokers are worth their weight in gold, is because they are very good at negotiation and know how to create win-win situations. They keep the parties talking and know how to work the offers until the business is sold. You should be prepared to be flexible while negotiating the sale of your business, also. Do not for example insist on ‘all-cash for the business and nothing else’. This sort of inflexible approach will usually kill a deal before it gets started. Also, let your broker do his or her job; do not discuss price and terms with prospective buyers directly. Let your broker know what points you are willing to negotiate and which you are not, in advance of getting offers. This will help to get more offers.

Most of all you want to do everything you can to make sure a deal to sell your business is concluded as quickly as possible. There is a law with regard to selling a business. “The more time that passes, the harder it is to sell a business, and the easier it is for a business deal to fall apart.” So, do what you can to expedite the sale of your business and work with your broker.

Category: Business