Buying a business can be a good deal until you pay for blue sky potential

Many people become entrepreneurs by buying an existing business. This is a good method to get into business for yourself because the business systems have been worked out, unneeded expenses have been eliminated and a customer base is in place. These are all good things for a new business owner because you will have immediate cash flow and lean operations. The only problem is that you probably paid too much for the business.

I have worked with many new entrepreneurs who have purchased an existing business and they just do not know why they are not making the money that was “promised” by the former owner. The new owner just cannot figure out why, at the end of the month, they do not have as much left over profit as was advertised. After investigation, it is clear to me and the new business owner that they simply paid too much for the existing business. They paid for “blue sky potential,” which they are unlikely to achieve. Blue sky is an additional premium paid for goodwill, or the potential to make more money by adding services or products. When buying a business you should pay for the value of the business and not for “blue sky.”

Valuing a business is part science, part art and part trust. The first thing that you must do is review the current owner’s “Schedule C” that is filed with the owner’s federal tax form 1040. Obtain the last 3 years’ forms. First, chart out the PROFIT of the business for the past three years to see if the profit is trending up, trending down or if it is stable. Stable profits are a good sign. Now, average the three years’ profit, multiply it by five, and you have a starting point for a negotiation of a sale price. After all, you are purchasing an income stream, and this is what needs to be valued. Most business deals seek a five-year pay back period.

You can also review the book value of the business by reviewing a very recent balance sheet, which can be pulled at any given point in time. Business owners may claim not to have a balance sheet, but their accountant does, and you need to review the current book value of the assets. You may be better off starting a negotiation by offering the owner book value of the business; however, most businesses are worth far more than the book value would indicate.

Some unscrupulous business owners will claim that part of their business is “cash sales,” implying that some income is not reported on their Schedule C. If the owner states this, run away from the deal and find a different business to buy. If the owner is willing to lie on their federal tax filings, they are just as likely to lie to you by misrepresenting their business.

So, you will have to measure the profits of the business, review the current book value of the business, and trust that the owner is transparent in their dealings to apply a proper value to the business. After all is satisfied, you can make a purchase offer.

Many people become entrepreneurs by buying an existing business. This is a good method to get into business for yourself because the business systems have been worked out, unneeded expenses have been eliminated and a customer base is in place. These are all good things for a new business owner because you will have immediate cash flow and lean operations. The only problem is that you probably paid too much for the business.

I have worked with many new entrepreneurs who have purchased an existing business and they just do not know why they are not making the money that was “promised” by the former owner. The new owner just cannot figure out why, at the end of the month, they do not have as much left over profit as was advertised. After investigation, it is clear to me and the new business owner that they simply paid too much for the existing business. They paid for “blue sky potential,” which they are unlikely to achieve. Blue sky is an additional premium paid for goodwill, or the potential to make more money by adding services or products. When buying a business you should pay for the value of the business and not for “blue sky.”

Valuing a business is part science, part art and part trust. The first thing that you must do is review the current owner’s “Schedule C” that is filed with the owner’s federal tax form 1040. Obtain the last 3 years’ forms. First, chart out the PROFIT of the business for the past three years to see if the profit is trending up, trending down or if it is stable. Stable profits are a good sign. Now, average the three years’ profit, multiply it by five, and you have a starting point for a negotiation of a sale price. After all, you are purchasing an income stream, and this is what needs to be valued. Most business deals seek a five-year pay back period.

You can also review the book value of the business by reviewing a very recent balance sheet, which can be pulled at any given point in time. Business owners may claim not to have a balance sheet, but their accountant does, and you need to review the current book value of the assets. You may be better off starting a negotiation by offering the owner book value of the business; however, most businesses are worth far more than the book value would indicate.

Some unscrupulous business owners will claim that part of their business is “cash sales,” implying that some income is not reported on their Schedule C. If the owner states this, run away from the deal and find a different business to buy. If the owner is willing to lie on their federal tax filings, they are just as likely to lie to you by misrepresenting their business.

So, you will have to measure the profits of the business, review the current book value of the business, and trust that the owner is transparent in their dealings to apply a proper value to the business. After all is satisfied, you can make a purchase offer. If you would like assistance in valuing an existing business, you may reach Michigan State University Extension educator Paul J. Werner at the following phone number: 906-524-6300.

Source: – msue.anr.msu.edu/news/buying_a_business_can_be_a_good_deal_until_you_pay_for_blue_sky_potential

Mark Cuban: Only Morons Start a Business on a Loan

Entrepreneur Mark Cuban discusses the U.S. Economy and starting a business with Trish Regan at the Clinton Global Initiative in Chicago on Bloomberg Television’s “Street Smart.” (Source: Bloomberg)

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Trish Regan and Adam Johnson provide actionable insight on the capital markets daily with regular segments such as “Chart Attack,” depicting likely market moves before they happen, and “Insight & Action” which explains original trading ideas that can make you money. In addition, “Street Smart” is filled with breaking news, political analysis, and market-moving interviews with exclusive guests such billionaire investor Carl Icahn, hedge fund titan Bill Ackman, automaker Elon Musk and more.

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Using a business broker

Selling a business can take a lot of time and effort, so it is a good idea to get professional help. Business brokers are experts in helping their clients to sell and buy businesses. You can find business brokers by searching the internet, Yellow Pages, real estate websites and industry-specific magazines and publications. A business broker will usually charge a percentage of the final sale price as a fee for their work.

You’ll need to weigh the pros and cons of using a business broker, and make the decision that is best for you.

Advantages of business brokers

• They will have experience in marketing and advertising businesses for sale.
• They can save you time by screening buyers and deciding who is and isn’t serious.
• They will usually already have a list of contacts who are looking to buy.
• Business brokers feel confident and comfortable with requesting the disclosure of a buyer’s financials and are well placed to make decisions about them.
• They can remain independent through the process and work efficiently towards selling your business without the emotional attachment that you may have.
• Typically, brokers have strong negotiation skills.

Disadvantages of business brokers

• You have to pay for the services of a business broker.
• You might feel you lack control over the process if you are used to doing everything yourself.
• You might feel some pressure to accept a contract you’re not happy with.
• They may want you to sign a contract at a lower price rather than not selling because their fee is a percentage of the sale price.

Choosing a business broker

If you do use a business broker, assess their experience and expertise before you hire them. Find out:

• how their fees are structured
• if they specialise in a particular type of business
• how many businesses they have bought and sold
• if they have ever owned a business
• if they can provide letters of reference
• how many clients they are currently working with and if they have time to properly represent your business.

Source: http://www.business.qld.gov.au/business/exiting-business/selling-business/using-business-broker

What’s My Business Worth? Easy Steps to Valuing a Business

A short video on a simple way to determine the value of a business.

Hi, I’m here on the bay front in beautiful St. Augustine, Fl. I’m a “business broker” and I work with buyers from all over the world to help them find the business that’s just right for them and I work with business owners to help them find an ideal buyer for their business.

Today I want to talk with you about how we can work together to find the fair market “value of your business” in today’s market.

When I talk with business owners I often ask, have you ever thought about “selling your business” and it’s interesting how often I get same response and that is, “I think about it every day.” Perhaps you’ve thought about selling your business, either to retire, to relocate or to take on an entirely new challenge.

I can’t help you decide when the time is right for you to sell your business, but we work together to determine the approximate “value of your business” in today’s marketplace. And that basically comes down to three very simple factors: the nature of your business, the annual revenues of your business and seller’s discretionary earnings. If I lost you on that last point — seller’s discretionary earnings — don’t despair We’re going to walk through an example to show you exactly how those are determined.

Seller’s discretionary earnings sounds like a complicated term, in fact some brokers use the term adjusted net, some use SDE, I prefer the term owner benefits. It really refers to the net profit of loss of a business with certain add backs, such as amortization, depreciation, compensation to the owner, a health insurance plan, a car payment even a cell phone payment. Any expenses that are a benefit to you as an owner are added back to determine total owner benefits. The easiest way to determine the value of your business is to compare it to other similar businesses that have sold. It’s very similar to what a residential real estate agent might do in preparing comps if you decided to sell your home.

When we talk about comparing your business to other similar businesses that have sold I use information from the database of the Business Brokers of Florida. We have information on thousands of “business sales.” For instance if we look in our database for information on pizza stores that have sold I can do a search and I find 241 pizza stores that have sold in Florida. And I can sort this information by the sold price, the annual revenues or by the owner benefits. And that way I can narrow the results to closely mirror those of your business.

Okay, let’s walk through an example of how we determine an approximate value in today’s market. We work with tax returns, profit and loss statements and other financial records. Tax returns are the highest and best evidence and I know you’ll find this shocking, but not all business owners report all income on their tax returns. But, for an example, let’s say you have a pizza shop with $500,000 in annual revenue.

Let’s say that this pizzeria had a tax return profit of $30,000, but that doesn’t represent the total owner benefits.  …..

The Business Buying Process: Three Methods for Assessing Value

Accurately determining the value of a business is an important part of the business buying process. Explore the three primary ways that Certified Valuation Analysts use to assess the value of a particular business. Whether you are buying a business or selling a business, an accurate valuation takes all three of these methodologies into account, then uses the one most appropriate for your situation Discover how these different approaches can affect the value and subsequently impact the business buying process.

Steven Schlagel is a CPA, Attorney and Certified Valuation Analyst with offices in both Durango, CO and Farmington, NM. More than the typical CPA, Steve mentors, coaches and consults with small business owners just like you every day to help them solve problems and build value in their business.

Preparing your business for sale

You only sell your business once, so you’ve got one chance to get it right. You don’t want to regret selling your business for less than it’s worth due to poor preparation.

Planning the sale of your business

Ideally, you will begin to prepare your business for sale well before you put it on the market. You want to ensure your business is represented at its best and show prospective buyers the benefits of buying your business. It could be as simple as making sure your shop floor is clean and presentable, or getting your financial statements ready.

Make yourself redundant

Make it easy for a buyer to step into your role. If you have all the knowledge and skills to run the business, the buyer’s greatest fear is that the business will walk out the door when you do.

Document the policies and procedures that exist as unwritten rules. It is advisable to systemise the various functions of your business and create a procedures manual. Any buyer will then be able to operate the business without the need to rely on you.

Each employee should have a documented clearly defined role, and a designated set of tasks and procedures which leads to measurable and desired outcomes.

Business relationships

It also helps to document the relationships which are key to your business. Convert any verbal agreements with suppliers and clients into written agreements wherever possible. Written agreements will make your business look stronger and build confidence in potential buyers. Examine existing contracts with suppliers and customers to ensure they will not expire or require renegotiation just as a new owner steps in.

Business makeover

Similar to selling any other valuable asset such as your home, there are several practical steps you can take to create a good first impression to a potential buyer. You will improve the perception of value to the buyer and may increase the price you can ask for your business.

• Inventory – sell all obsolete or slow moving stock items. This will improve both your sales figures, and eliminate disputes about the value of inventory during the sale.
• Plant and equipment – sell any redundant or obsolete plant and equipment, machinery, spare parts, and scrap that are no longer required.
• Business premises – look at your premises with the eyes of a potential buyer. Clean up, maintain, and paint the premises where necessary. Ensure the premises comply with all regulatory requirements.
• Employee – ask your staff to take their leave and other entitlements prior to the sale, otherwise the sale price may be reduced by the value of their entitlements. Retaining key employees after transition to the new owner may be important for a successful sale, so determine which employees are prepared to stay with the business.
• Commercial premises leases – Review business premises leases and ensure the lease does not expire or require renegotiation during the time when you plan to sell the business.

Business financials

Ensure your financial records are up to date to clearly demonstrate the true profitability of your business to a potential buyer.

• Debtors – collect all payments that are overdue from your clients. Potential buyers may be discouraged about buying a business with clients who take a long time to pay their accounts.
• Creditors – ensure you are not late with payments to your suppliers. This will create a positive impression of the financial strength of your business.
• Produce monthly profit reports to demonstrate to your buyer your ability to monitor and manage the performance of your business.
• Prepare audited financial statements so the potential buyer is confident of the financial performance and value of the business.

Prepare a buyer’s information pack

Buyers will be working through their own due diligence process and will want to know exactly what they are getting for the purchase price. It’s a good idea to prepare information packs for genuine potential buyers.

Download the BIZGuide: Buyer’s information pack template for everything you should include in your pack

When selling a small business, obtain professional financial and legal advice to prepare the required information and documentation and to ensure you comply with the requirements for a valid sale.

Source: http://www.smallbusiness.wa.gov.au/step-2-preparing-your-business-for-sale/

Dealing with Startup Risks

Not all successful entrepreneurs are quintessential risk-takers. But knowing your tolerance for risk and how risky your business idea is is an important step when starting a business.

The conventional wisdom holds that entrepreneurs are fearless risk-takers. Quintessential entrepreneur Richard Branson, founder of the Virgin Group empire, is famous for risky publicity stunts such as racing powerboats, jumping off buildings, and flying in hot-air balloons.

Do you wonder whether you have the fortitude to be a successful entrepreneur? There are many ways to assess your tolerance for risk, but the key is looking within yourself. Do you seek out new experiences? Do you enjoy learning new skills? Or are you more comfortable with routine?

Don’t overthink it. Several studies have shown that high-risk tolerance is not the most important characteristic for entrepreneurial success. Keith McFarland, an entrepreneurship expert and coauthor of The Breakthrough Company, gave a personality test to 500 entrepreneurial chief executive officers. McFarland found that the CEOs’ scores varied when it came to risk tolerance, but what they had in common was a very high score in ability to perform under pressure.

In another study, the Cranfield School of Management in the United Kingdom surveyed 50 entrepreneurs’ risk tolerance and confidence. Those with lower risk tolerance but higher confidence had higher profits.

Is Your Business Too Risky?

But if risk tolerance in itself is not the key to entrepreneurial success, you absolutely do need confidence in your ability to manage risk and the flexibility to handle challenges. This means a critical part of assessing your entrepreneurial fitness is assessing the riskiness of your business idea.

Briefly consider what risks your new business involves. Is your idea brand-new to the market, or is it a variation on an existing product? Is there a proven demand for your product or service? What is the future outlook for your industry? What is the competition like? How much will it cost to start the business, and how much of that do you have?

Envision worst-case scenarios, how you might handle them, and how you would feel. If the idea fills you with anxiety, perhaps this business is too risky for you and you need to reconsider or find a way to manage the risk. If you feel confident, there is a good fit between your risk tolerance and your business idea.

What’s at Stake?

If your new business idea fails, what do you stand to lose? It could be your own money, your investors’ money, your reputation in the community, your sense of pride, your relationships with business colleagues, or even your relationships with family members. Assess where you would draw the line. Perhaps you’re comfortable losing your own money but not losing investors’ money.

Finally, if you have a significant other, spouse, or children, consider how they will tolerate the risk. Is your spouse willing to put your family home up as collateral for the business? Your family’s support is essential to your success, so you need to assess the limits of that support before you put itat risk.

Ways Around Low Risk Tolerance

Do you have a low level of risk tolerance? That doesn’t mean you can’t be an entrepreneur. Consider bringing on a partner who’s more risk tolerant so that you balance each other out.

You can also take small steps to make yourself more comfortable with risks. Start by taking chances in other areas of your life. Drive home from work a different way; take a class in something you’ve never done; volunteer for a new project or committee at work; try a different cuisine every week; vacation in a new city or country. As most of these little “risks” pay off, you may find that you start to enjoy taking risks.

Successful entrepreneurs take calculated risks, not foolish ones. By measuring your risk and your comfort with it, you’ll find that the risks you take lead to rewards.

 

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Business Takeaways:

 

1. Not all successful business owners are fearless risk-takers.
2. Even if you are comfortable with taking risks, it’s important to determine whether your business idea is too risky to succeed.
3. If you determine you are not a risk-taker, there are ways to both mitigate business risks and become more comfortable with them.

Source: http://www.allbusiness.com/dealing-with-startup-risks/16758174-1.html

How to Research a Business Opportunity

Protect yourself by learning what a business opportunity really is, how the government regulates them, and the steps you should take to ensure you’ve found the best opportunity available.

Just what is a business opportunity? That question has plagued a great many people trying to decide whether to buy a current independent business, a franchise, or what we’ll refer to in this text as a business opportunity. To allay the confusion, we offer a simple analogy. Think back to elementary school when your teacher was explaining the difference between a rectangle and a square. A square is also a rectangle, but a rectangle isn’t necessarily a square. The same relationship exists between business opportunities, independent businesses for sale and franchises. All franchises and independent businesses for sale are business opportunities, but not all business opportunities meet the requirement of being a franchise nor are they in the strictest sense of the word independent businesses for sale.

Making matters even more confusing is the fact that 26 states have passed laws defining business opportunities and regulating their sales. Often these statutes are drafted so comprehensively that they include franchises as well.

Not every state with a business opportunity law defines the term in the same manner. However, most of them use the following general criteria to define one:

1. A business opportunity involves the sale or lease of any product, service, equipment, etc. that will enable the purchaser-licensee to begin a business.2. The licensor or seller of a business opportunity declares that it will secure or assist the buyer in finding a suitable location or provide the product to the purchaser-licensee.

3. The licensor-seller guarantees an income greater than or equal to the price the licensee-buyer pays for the product when it’s resold and that there is a market present for the product or service.

4. The initial fee paid to the seller in order to start the business opportunity must range between $400 and $1,000.

5. The licensor-seller promises to buy back any product purchased by the licensee-buyer in the event it cannot be sold to the prospective customers of the business.

6. Any products or services developed by the seller-licensor will be purchased by the licensee-buyer.

7. The licensor-seller of the business opportunity will supply a sales or marketing program for the licensee-buyer that many times will include the use of a trade name or trademark.

The laws covering business opportunity ventures usually exclude the sale of an independent business by its owner. Rather, they are meant to cover the multiple sales of distributorships or businesses that do not meet the requirements of a franchise under the Federal Trade Commission (FTC) rule passed in 1979. This act defines business offerings in three formats: package franchises, product franchises and business opportunity ventures.

In order to be a business opportunity venture under the FTC rule, four elements must be present:

1. The individual who buys a business opportunity, often referred to as a licensee or franchisee, must distribute or sell goods or services supplied by the licenser or franchisor.2. The licensor or franchisor must help secure a retail outlet or accounts for the goods and services the licensee is distributing or selling.

3. There must be a cash transaction between the two parties of at least $500 prior to or within six months after the licensee or franchisee starts the business venture.

4. All terms and conditions of the relationship between the licensor and the licensee must be stated in writing.

You can readily see that the sale of business opportunities as defined by the FTC rule is quite different from the sale of an independent business. When you’re dealing with the sale of an independent business, the buyer has no obligations to the seller. Once the sales transaction is completed, the buyer can subscribe to any business operations system he or she prefers. There is no continued relationship required by the seller. Business opportunity ventures, like franchises, are businesses in which the seller makes a commitment of continuing involvement with the buyer.

Source: http://www.entrepreneur.com/article/42940