Tag Archives: financials

Thinking Of Buying a Business? Buyer Beware!

For some reason, many people seem to want to spend too much money to purchase existing businesses. This is confusing, until you realize that buyers are trying to purchase solutions to a number of problems. Prospective buyers see an operating business and tend to think that they can simply buy it and it will continue to operate as it does under the ownership of the seller. As a buyer, you might imagine the business will allow you to be your own boss, pay you a great salary, raise your self-esteem, afford you an attractive lifestyle and eventually make you rich. If this is to be your destiny, you’ve got some serious homework to do… before signing away your hard-earned equity. If you are thinking about buying a business, you should take a few moments to consider the following:

1. Determine why the business is for sale.

Every seller will have a story, but the truth is – if a business is doing all of the things it should for its owner it should be very difficult to part with. There has to be a very credible reason for selling, such as poor health or retirement. Most anything else should raise your suspicions and cause you to dig deeper.

2. The most important information available to you will likely come from the financial history.

Insist on accessing the past three years of statements and if you can’t get them without a fuss, walk away. This is usually the first sign of trouble. If you can’t get the financials easily and quickly, your seller may be dishonest or disorganized, either of which is bound to bring you sorrow. Unless you are an accountant, turn the financial statements over to a qualified, trusted accountant for interpretation.

3. If the business location is leased and if it is important, what are the terms of the lease?

How long is the term of the existing lease? Are there any hooks that tie the lease rate to your revenue/sales? Are there any stepped increase-type clauses that could cause you to be paying more to the lessor than you can afford to pay yourself? I’m aware of at least one lease that resulted in the business owner paying in excess of $8,000 per month, far more than this owner could ever pay themselves. This is clearly a rent-seeker out of control and one stressed, broke business owner.

4. If the business is in a strip mall or a hotel, does the lease allow the landlord to lease to another similar business in their facility?

Or does it protect you with a clause that prohibits the landlord from doing this?

5. Can the business pay down the cost of the purchase and still pay you a reasonable salary?

This is critical to you from a personal perspective but also when selling the concept to a lender.

6. Determine what you are paying for.

When purchasing a business you can choose to purchase the entity or the assets. Purchasing the assets is often less risky from the buyers perspective. Purchasing the entity is the cleanest and easiest from the seller’s perspective.

7. If you purchase the entity (for example, the corporation), you may be buying some liabilities that you might not wish to take on.

For example, have the taxes been paid? Can the seller provide proof that taxes have been paid? Are there any outstanding lawsuits or employee or customer claims? Be sure to get a clean bill of health in writing.

8. If you are purchasing assets, how much of the purchase price is inventory and how much is equipment?

You will want to place your own value on these items but it is stronger to get a third party assessment of assets when trying to gain the vote of a lender. When it comes to assessing values, lenders might have a preference as to who does the assessments.

9. Determine what value the seller places on goodwill.

Most lenders place zero value on goodwill. If you are attempting to borrow money to purchase the business, you will likely find it difficult to sell the lender on any significant amount of goodwill.

10. It is important to understand that the process of ‘being in business’ is very different than it appears to an onlooker.

Once you have become enamoured with the notion of owning and operating a particular business, it gets difficult to be objective. Try to imagine what it would be like to work in the business. Can you see yourself standing serving customers in this business for the next five to ten years? Is it something you will enjoy doing?

11. You should definitely check the seller’s product or service sources, the companies or individuals he or she purchase from.

Determine how stable they are and if they will do business with you (at the same rates as they give him or her).

12. If you are planning to borrow the money to purchase the business, where will it come from?

Do you have at least 10% to put in of your own money/equity? Whether you’re going through a chartered bank or an alternate lender, 20% of your own equity makes a stronger application. To avoid surprises, know your target agencies and determine what they expect.

I’m not trying to create the impression that business sellers are dishonest or less than ethical. As an owner who might want to sell one day, I know that we place a high emotional value on our investment in our business. We pay for it each day with our energy and our lives and when it comes to selling, we expect and hope to get top dollar for our efforts. For me, ultimately it will be most rewarding if the new owner is able to pay a fair price and then succeed.

Buyers often ask me if a business plan is as important or necessary when purchasing a business. Yes, it is. Your business planning should be made somewhat easier by the fact that some of your market research should come from the existing owner. I know this is an old cliché, but the rule with purchasing a business is buyer beware. Take off those rose coloured glasses and take the time to get a clear picture before putting your assets on the line.


Setting Prices for Products and Services

Q: How do I know what my time is worth and how do I charge accordingly?

This is question I am often asked by new and aspiring business owners as they work their way through the writing of their business plan.

The matter of determining what to charge for your time is a personal one. Start-ups sometimes make one of two mistakes in this area: charging too much or not charging enough. The antidote for undercharging is to run a complete set of financial pro formas to ensure that your rates are sufficient to pay the operating expenses and be profitable.  The way to ward off both under- and overcharging is to research your competition, with attention to the rates they charge for similar services. With this in mind, here are a few things to keep in mind when setting your hourly rates (list is adapted from the Online Business Planner’s RoadMap Step 44: Present Prices and Pricing Strategy).

  1. How price sensitive are your customers? If price is a major purchasing consideration for your customers, you’ll have to toe the line. If price is less important than other factors (quality, speed of delivery, brand, etc.), you might have more latitude as to how much you charge per hour.
  2. Do your customers decide to buy based on price or on other characteristics such as quality, location, or convenience?
  3. What is the cost of producing your products or services? Your prices must include the cost of providing the service (cost of goods sold), plus operating expenses, plus profit.
  4. What are your competitors’ prices for similar products or services? Those buying your services are continually comparing with competitors; you don’t have to undercut everyone, but you do have to be in the ballpark!
  5. How many units do you have to sell in order to break-even or earn a profit? Break-even will be revealed when you complete the pro forma financials. You will want to ensure that you break-even early enough in the year to allow time to earn profit.
  6. What are the Industry standard mark-ups or margins for your product or service? Standards or norms should be evident from your research of competitors. In some cases mark-ups or margins might be controlled or influenced by suppliers.
  7. What discount rates will you offer for bulk purchases? Be sure your regular prices are set high enough to allow for any planned discounts, deals, or costs such as affiliate marketing.
  8. How much will your customer pay for your product or service? At the end of the day, your customers will vote with their money. In the start-up stage, you can survey to determine how much they say they will pay, but once in business you will know whether or not you are making sales, and adjust accordingly. For example, you can test different rates to see if price makes a difference in your conversion rates.
  9. What is the relationship of supply to demand? For example, if you use subcontractors to provide services, their rates might determine how much your prices must be. If your subcontractor’s rates don’t leave you enough margin, you might be faced with finding new subcontractors or increasing your rates.
  10. What are the consumer buying trends? For example, an overabundance of providers might means lower prices; a shortage of providers might mean more pricing headroom, at least for a while. In almost any market, more competitors will mean you have to have a sharper pencil when it comes to pricing.
  11. What is your level of risk? Higher risk should equate to higher profit margins. Lower risk might enable
  12. What is your desired profit margin? Depending on how badly you need to work and how necessary your services are – a well qualified and credentialed consultant who doesn’t need a lot of work might command higher prices as long as they get the amount of work they want.
  13. What are your personal and corporate financial goals? Other factors come into play on pricing, such as how much money you personally wish to earn, and what financial aspirations you have set for your business.

Welcome to the tightrope we all walk as entrepreneurs and business owners. Hope this helps you find your niche.

To get started on your pricing, download the free worksheet we’ve created for you #33 Pricing. Use the worksheet to establish prices for your products and services. You will likely employ all three methods: pricing to market, pricing to cost and break-even pricing.

View a complete list of all 66 RiskBuster Business Planning Worksheets here.



Writing a Business Plan: The Dark Art of Predicting The Future

By Dan Boudreau

The strongest resistance to business planning typically comes from diehard pessimists, who ask, “What good are my 3-year financial projections if I step off the curb tomorrow and get hit by a bus?”

That’s a great question that will stop anyone from ever doing a business plan. And it seems logical enough, until you consider that everything great that happens in the world comes about because somebody decided to make an impact on the future.

Truthfully, you might be the most unpredictable element of your business plan. Here are a few of the ways in which you can become the real wildcard in your business plan.

  1. You might not believe you can succeed, which is the kiss of death for any business. Your lack of belief in your business assures its failure.
  2. You might hate managing people, which is impossible to know until you try. Business owners need to be skilled at managing several groups of people; employees, customers, suppliers, and creative teams.
  3. After going through all the effort of getting your business started, you might discover that you really want to work for someone else and not carry the responsibility of owning and running a business.
  4. You might discover that you can’t turn the business off, that you simply worry about it until you burnout.
  5. You might learn that you’re not a salesperson. Not everyone is, but successful business owners are.
  6. As the owner of a business, you might find that the activities that fill your hours and days—marketing, selling, logistics—are things you really don’t enjoy. This leads to artists who insist on doing all art while ignoring the business. It happens to the technician who gets immersed in his profession and refuses to get out and market his business.
  7. You might learn that you’re hopeless with finances, and that you’re missing some of the necessary knowledge and skills to manage your business—how to prepare a cash flow forecast, how to read an income statement, how to keep records.
  8. You might discover that you’re disorganized, and that you dread having to plan your days, weeks and months. Does freedom unleash your creative spirit, or do you self-destruct when faced with an open road?
  9. After getting immersed in your business, you might discover that you work too long and too hard for the amount of money you earn. It’s true that many small and micro businesses never get fine tuned to the point of earning a profit; too many evolve into a twisted form of enslavement.

Any business worth its salt will present its owner with many learning opportunities. Each speed bump can be taken as an opportunity to learn and grow; or it can be the roadblock that motivates you to change direction and get a job.

It seems insane to attempt to predict the future, but it seems even more so to accept a life of drudgery in a dead end job. For those who aspire to improve their work life by working at something they enjoy, business planning is a great place to start, even if it seems a bit crazy at first.

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New Business Deal Breakers

new_business_deal_breakers-001No matter how brilliant a business idea might be, no matter how eloquent the business plan, certain deal breakers will stop it in its tracks. Deal breakers are the secrets you would rather not share with your business analyst or banker, though you probably should.

If you are preparing your business plan in order to apply for a loan to start or grow a business, here are some common deal breakers you should know about:

1. Inadequate Equity. You have undoubtedly heard gripping stories about folks who wangle 100% financing without investing a dime of their own. Those tales make great fodder for talk shows and infomercials, but lack of equity is usually a deal breaker in the real business world. Unless you’re borrowing from love ones, business start-ups should plan to bring at least 20% equity to the deal.

2. Cards & Toys. This means ballooned credit card balances and a backyard bursting with toys, such as boats, bikes, and skidoos. There is nothing wrong with owning toys if you can afford them; it’s the high interest loans with outstanding balances and endless minimum payments that break the deal. It’s easy to fall into the “cards & toys” trap when you are doing well financially. The problem usually surfaces following an unplanned reduction in earnings, often triggered by an injury, an illness, or loss of a job.

3. Fantasy Forecasts, Unrealistic Cashflow. Would you invest in a new venture without the seeing sales and cashflow forecasts? Financial projections are your cheapest form of self-defense and an opportunity to impress lenders that you know or do not know your business. Loading your business plan with pie-in-the-sky sales projections and fictional cashflow forecasts are unlikely to help entice rational investors to a deal. Conservative sales and realistic expenses are necessary building blocks for credible financial projections.

4. Looming Liabilities. Liabilities can arise from many places, often not related to a business deal. For example, legal battles and bitter marital break-ups do not endear one to potential lenders. Any business opportunity will lose its luster in the shadow of legal strife. You will need to have a stellar strategy for all liabilities.

5. Ten-Bell Credit Rating. A 10-bell pepper will peel the gums off your molars; a 10-bell credit rating will undermine even the best business plan and have your banker reaching for Rolaids. In this highly leveraged, consumer frenzied world, it’s easy to end up with a financial black eye. Negative credit ratings can occur from not paying bills, making late payments, or attempting to sweep that old student loan under the carpet. When it comes to accessing money to get your business started, financial skeletons will spook potential investors.

If you’re planning to pitch your business plan, take time to scan your state of affairs for anything that will make you less attractive. You will find it easier to entice investors or lenders once any deal breakers have been dealt with.

Related Articles:

Are You Starving Your New Business?

Three Keys to Clear Financial Communications

Seven Foolproof Ways of Going Broke

Seven Secrets to Forecasting a Rock Solid Cash Flow

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