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How To Buy A Small Business And Let The Government Finance It
By Robert E. Seng
AuthorHouseCopyright © 2009 Robert E. Seng
All right reserved.
Chapter OneLet's Talk
This book may save you thousands of dollars and many headaches if you decide to buy a small business. Buying a business is a big step, so be sure to prepare yourself before realizing the "dream"; otherwise, it could turn into a nightmare.
Since you were a youngster, you have heard the expressions about freedom: "be your own boss" or "be independent, own your own business." After working for someone else, most of us can identify with these statements. We would love not having to work for anyone else, report to anyone else, work under what we would consider adverse conditions, or be laid off or fired. If you work for yourself, no one will change your hours, no one will supervise your work or tell you how to do it, and no one will be around to ruin your day when they are in a bad mood. What a wonderful world! You are totally independent.
All these statements can be true, provided you take certain steps when buying your business to ensure that you are getting everything you are paying for and not being mislead or deceived by an unscrupulous seller.
An Owner Wears Many Hats
It's important that you consider the tremendous amount of work and time that you must devote to operate and grow your business. In a small business,you're sometimes the President, Sales Manager, Human Resources Manager, Financial Manager, Operations Manager, Computer Expert, Buyer, Customer Service Manager, as well as the Cashier and Janitor. It's a big job with many responsibilities and, in addition, you must be motivated and be a motivator. You should also be able to recruit, train, and motivate new employees. Owning your own business can be a big job, but there are great rewards if you are successful.
Know Something About the Business
When buying a small retail business, it's a good idea to know something about the business and to know a lot about yourself. You should buy a business that you have working experience with or one you know very well.
Know Something About Yourself
Also, you need to understand if you are right for the business. In other words, don't buy a business that requires a lot of customer contact if you don't particularly like people. Instead, buy one where you have little or no contact with the public. Some businesses will have both contact and no-contact positions. For example, in the restaurant business, if you enjoy working with people, you can be at the door greeting them, handling service, and satisfying customers. Or, if you prefer, you could be in the kitchen preparing food and have someone else be the greeter.
I know a man who is one of the best jewelry repairmen in the city, but he has absolutely no personality and doesn't like to deal with people. His shop also sells jewelry, so he employs a very talented lady to do the selling, and he confines his duties to inspecting items to be repaired, quoting prices, and repairing the jewelry. He is very successful and has been in business for over fifteen years.
If you don't know anything about the business-get experience before you make a final decision.
As stated previously, one of the easiest ways to fail in a small retail business is to buy one you know nothing about. If you consider such a business, then get a job in that field working for someone else until you have a good "feel" for the business, understand its pluses and minuses, and feel comfortable working in such an environment.
A common way to solve this problem is to make the sale contingent upon the seller staying on long enough to train the new owner. You, the buyer, retain the right to cancel the sale if you don't fit in or if the business is not what it appeared to be.
In my career of buying and selling businesses, I have seen successes and failures, some of them from inexperience, some from stupidity, and some from lack of good judgment.
In Florida, a man and his wife operated a successful restaurant for over fifteen years, selling salads, soup, and sandwiches. They made fresh chicken, tuna, shrimp, and potato salad every morning.
They arrived at the restaurant at 6 a.m. and started preparing the fresh salads for the lunch and dinner trade. Since they were already at the restaurant preparing menu items for the day, they developed a small breakfast business that was very profitable. Their salads were served with a stick of delicious French bread, which was baked a little at a time to keep it fresh. The soups were a premium canned soup to which they added additional ingredients to make them thicker and tastier.
Their business was very successful for over fifteen years, but when the wife became ill and could no longer work, they decided to sell. The business was purchased by a woman, who had been traveling for a clothing firm. Her son, who had worked in construction, was going to help her.
After about a month in the business, the woman decided that instead of coming in so early in the morning to prepare the salads, they would prepare them the night before and keep them in the refrigerator.
Since they now opened later in the morning, the breakfast business disappeared. The salads, having been in the refrigerator all night, did not appear fresh, and each salad took on some of the flavors of the other salads. As business slowed due to the poor quality of the food, the woman and her son decided to cut costs and bought a cheaper French bread that was much inferior to the previous bread. As a result of these changes, the business declined and eventually the woman had to sell it for inventory and lost $100,000.
The lesson here is "If it's not broke, don't fix it." If they had just continued the successful operation they purchased, they would probably still be in business today.
Anecdote # 2
Tony is an excellent chef. His food is delicious, and his presentation is beautiful. When he prepares a meal, it looks so good you can hardly wait to eat it; it is marvelous.
Tony opened a restaurant, and people flocked to it. As time passed, however, his business slowly declined. He couldn't understand why everyone wouldn't come to eat his delicious food. Finally, Tony, with some advice from a consultant, surveyed some of his former clients.
To his surprise, the common answer was "we loved your food, but the service was so poor, we were frustrated by the time we were served." Tony was a talented chef, but he wasn't very good at recruitment, hiring, and training.
He solved his problem by hiring a very talented woman who had a great ability to recruit and motivate employees, and she did a magnificent job of improving service.
When you own a business, you must wear many hats as mentioned earlier. Having a good product is not enough. Successful business owners have to be involved in every facet of their business.
Anecdote # 3
A man once purchased a business in a shopping mall. Only fat-free hot dogs, French fries, and drinks were sold. He had one cook, who didn't need much experience to cook hot dogs and French fries, and one server, who put the food on a plate and gave it to the customer. The owner sat on a stool at the cash register and collected the money.
The business was eventually sold, and the new owner didn't change a thing. For over seven years now, the new owner has had a very successful business and income.
If you buy a successful business, it is usually financially beneficial to not make any substantial changes until you thoroughly understand the business and your customers.
Chapter TwoKnow What You're Paying For
Small businesses are sold in various ways, including the following:
1. Listings by owners in newspapers or other media
2. Through friends and associates
3. Contact with a licensed business broker
Using a Business Broker
It is sometimes suggested that one of the best and safest ways to purchase a small business is by having a business broker help negotiate the sale. They are licensed by the state and have to be honest in their dealings or they can lose their license. Generally, they secure a great deal of information from the seller, which saves you time, and they can usually answer many of your questions about the business before you ever have to meet the seller.
Many brokers already have important information about sales, gross profit, expenses, occupancy costs, and terms, as well as financial statements or pro forma statements, and, in some cases, brokers have the actual income tax returns from the business for the last several years. All of this information may not be totally accurate, but at least it is something to verify and gives you a place to start.
It's always best to be armed with the facts before talking to the owner for the first time, and using a business broker is a good way to gather the necessary information before-hand. Many people will tell you that going to a business broker will cost additional money; however, the commission is paid by the seller, and your broker should ensure that the eventual sales price represents a fair market price for the business.
When you have all the information you need before meeting with the seller, it makes you a more "qualified buyer" and prepares you to ask more intelligent questions. First impressions are usually lasting, and you should make it a point to be prepared and proactive in your business dealings.
Many people who buy a small business and particularly if it is their first business tend to be so enthusiastic that they fail to adequately protect themselves. A broker can help reduce the emotion and help guide you through the many "due diligence" steps that must be followed.
While it is true that most small businesses can provide an excellent income, benefits and security, there is never a guarantee. If not handled correctly from the start, most businesses can also produce anxiety, frustration, and heartache. Using a business broker can help avoid making mistakes in this critical and expensive decision.
The Burden Is On The Buyer
The burden is always on the buyer to examine a business thoroughly and satisfy themselves that they are getting what they are paying for. It is the responsibility of the buyer to substantiate the sales, expenses, and income associated with the business, as well as many other items that will be identified in future chapters.
Although many sellers are honest, the best policy is always to assume nothing and adhere to the old axiom "buyer beware."
The following chapters will give you a blueprint to follow in buying your small retail business. Follow them and you can be assured that you will be well prepared for what you are about to buy.
Chapter ThreeBasic Financial Statements
If done properly, financial statements are like a laboratory analysis for doctors in making a diagnosis of what is really happening beneath the surface.
The financial "numbers" can indicate how solvent (Balance Sheet) and how profitable (Operating Statement) a company is. These two financial statements, along with a Cash Flow Statement, are the three reports you, your broker, and your accountant must see before considering the purchase of a business.
If a company doesn't have at least a balance sheet and an operating statement, you should be very skeptical and make this information a contingency in any potential purchase.
The Balance Sheet
A balance sheet represents a company's financial position for one day during its fiscal year-for example, the last day of its accounting period, which can differ from the more familiar calendar year. Companies typically select an ending period that corresponds to a time when their business activities have reached the lowest point in their annual cycle, which is referred to as their natural business year.
How the Balance Sheet Works
The balance sheet is divided into two parts that, based on the following equation, must equal (or balance out) each other. The main formula behind balance sheets is as follows:
Assets = Liabilities + Shareholders' Equity
This means that assets, or the means used to operate the company, are balanced by a company's financial obligations, along with the equity investment brought into the company and any retained earnings.
Assets are what a company uses to operate its business, while its liabilities and equity are two sources that support these assets. Owners' equity, also referred to as shareholders' equity in a publicly traded company, is the amount of money initially invested in the company plus any retained earnings, and it represents a source of funding for the company.
It is important to note that a balance sheet is a snapshot of the company's financial position at a single point in time.
Types of Assets
Current assets have a life span of one year or less, meaning they can be easily converted into cash. Asset classes are cash and cash equivalents, accounts receivable, and inventory. Cash, the most fundamental of current assets, also includes non-restricted bank accounts and checks.
Cash equivalents are very safe assets that can be readily converted into cash, such as U.S. Treasury, savings, and money market accounts.
Accounts receivable consist of the short-term obligations owed to the company by its clients. Companies often sell products or services to customers on credit, which are then held in this account until they are paid off by the clients.
Lastly, inventory represents the raw materials, work-in-progress goods, and the company's finished goods. Depending on the company, the exact makeup of the inventory account will differ. For example, a manufacturing firm will carry a large amount of raw materials, while a retail firm carries none. The makeup of a retailer's inventory typically consists of goods purchased from manufacturers and wholesalers.
Non-current assets are those assets that are not easily turned into cash and usually have a life span of a year or more. They can refer to tangible assets, such as machinery, computers, buildings, and land. Non-current assets can also be intangible assets, such as goodwill, patents, or copyrights. While these assets are not physical in nature, they are often the resources that can make or break a company-the value of a brand name, for instance, should not be underestimated.
Depreciation is calculated and deducted from most of these assets, which represents the economic cost of the asset over its useful life.
Types of Liabilities
On the other side of the balance sheet are the liabilities. These are the financial obligations a company owes to outside parties. Like assets, they can be both current and long term.
Current Liabilities are the company's liabilities, which will come due, or must be paid, within one year. This is comprised of both shorter term borrowings, such as accounts payables, along with the current portion of longer term borrowing, such as the latest interest payment on a 10-year loan.
Long-term Liabilities are debts and other nondebt financial obligations, which are due after a period of at least one year from the date of the balance sheet.
Shareholders' Equity is the initial amount of money invested in a business. If, at the end of the fiscal year, a company decides to reinvest its net earnings in the company (after taxes), these retained earnings will be transferred from the income statement onto the balance sheet into the shareholders' equity account. This account represents a company's total net worth. In order for the balance sheet to balance, total assets on one side have to equal total liabilities plus shareholders' equity on the other.
Reading the Balance Sheet
Many people have a natural aversion to accounting, but if you plan to become knowledgeable, you need to learn this rather easy task. Don't be intimidated.
As you can see from the balance sheet below, it is broken into two sides. Assets are on the left side, and the right side contains the company's liabilities and the shareholders' equity. It also can be seen that this balance sheet is in balance, since the value of the assets equals the combined value of the liabilities and shareholders' equity.
Excerpted from How To Buy A Small Business And Let The Government Finance It by Robert E. Seng Copyright © 2009 by Robert E. Seng. Excerpted by permission.
All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.
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Table of Contents
Chapter 1: Let's Talk....................14
Chapter 2: Know What You're Paying For....................24
Chapter 3: Basic Financial Statements....................28
Chapter 4: Determining Sales....................53
Chapter 5: Confirming Cost of Sales....................57
Chapter 6: Confirming Gross Profit....................61
Chapter 7: Determining Operating Expense....................64
Chapter 8: Determining Which Employees to Retain....................69
Chapter 9: Verify Lease Terms or Appraise Real Estate....................71
Chapter 10: Review Any Equipment or Furniture Leases....................74
Chapter 11: Check Out the Neighborhood....................75
Chapter 12: Confirm All Taxes....................77
Chapter 13: New Competition?....................78
Chapter 14: Check All Equipment and Facilities....................80
Chapter 15: The Non-Compete Agreements....................81
Chapter 16: Licenses and Permits....................82
Chapter 17: Insurance....................84
Chapter 18: The Sales Contract....................89
Chapter 19: Selecting A Structure....................92
Chapter 20: Business Plan....................100
Chapter 21: Let the Government Finance Your Purchase....................132
Chapter 22: The Small Business Administration....................140
Chapter 23: Information Necessary for the SBA....................146
Chapter 24: Venture Capital and Angels....................150
Chapter 25: GovernmentGrants....................152
Chapter 26: Stimulus Bill....................153
Chapter 27: Helping Small Business Grow....................161
Chapter 28: You Can Do It....................177