4 Tips to Valuing a Business For Purchases

You’ve made the decision to buy a business. Good choice! Buying a business can be the best way to increase your personal wealth. You’ve found this wonderful illustrious business that has incredible potential and you know you are absolutely going to love working there for the rest of your life, or at least until you make your first million ;) Now the seller is asking a price that sounds right, but how did they come to that price? Valuing a business is more than often an ambiguous process that comes down to more opinion than fact. Market value for your business is the price that a reasonable buyer would pay and reasonable seller would pay for in a normal market of business sales. If you’re reading this article – you’re not normal. I say this in a good way. You’re actually above normal. Most people who ATTEMPT to buy a business do very little studying and research into the process. Consequently they either don’t buy the business due to insecurities or inadequate funding or they buy the business and fail due to poor preparation. So how much is that business worth? Here are 4 tips to assist you in valuing the business.

1. If the business is making a profit, how much of a profit does it REALLY make? I’ve seen business brokers, and listing agents come up with all sorts of amazing projections on what the business should be making and then trying to sell it based on that number. If the business broker or seller can predict the future then they shouldn’t be in entrepreneurship – they should be in the stock market! If the price is based on earnings, and the earnings are based on “pro-forma” or projected income (not actual) then forget any price they put to the business. You’re buying income not income potential. If you want some great income potential I have some swamp land for sale for you in Florida that is definitely going to go up in value – some day.

2. If the business is losing money, it’s worth the assets current resale value minus the debt that you’re assuming in the business. This means if the business has 1 widget that they bought for $100,000, business debt of $20,000 – you don’t know the value of the business! If you can sell the widget for $40,000 and the business debt is $20,000 the business is worth $20,000.

3. What is the business worth to you? Most of the buyers I coach are individuals who are more interested in buying a business/job instead of investing millions of dollars into a business that can be made into a public offering. Consequently buying a business means replacing a full-time income for twice the work as your previous job. However people seek self employment for a variety of reasons, income, pride, the freedom of spending more time with family etc. List 10 reasons why you want to be self employed. Now put a price tag to every item you’ve listed. If any of those price tags are “infinite” self employment is for you.

4. The four P’s – Pick your Price based on Past Performance or what was Put in the Previous owners Pocket? – Pay for past performance – never pay for what the business could or should be. Remember that you are the buyer and you should try to pick your price based on how much money the business has put in the previous owners pocket. All formal and informal business valuations are established on “net present value.” Please remember that off book money absolutely can not account for the price! Off book money is money not reported to the IRS. If the seller didn’t declare it as income or benefits then it does not count for the income to determine the price.

The Market is Excited, But Challenges Still Loom For Small Businesses

There is a disconnect between the market rally indicating the economy may soon recover and small businesses who continue to face a challenging environment. First, you must keep the market rally in historical perspective and you must interpret the market’s rally. The market rally has caused some excitement due to being one of the strongest market rallies in history. However the 50% rise between March and July 2009 should be compared to other historical benchmarks. According to Barron’s Market Week (August 3, 2009), in July 1997 the S&P ended at 954 and the S&P ended July 2009 at 987. The return during a 12 year period was only 3% (total return, almost no return on an annualized basis). Additionally, the July 2009 S&P level is well below the October 2007 all time high of around 1,580 (over 37% lower according to Yahoo! Finance). The current market rally is indicating that for large and publicly traded companies times are beginning to stabilize. Perhaps not improving, but less bad news is good news in the current environment. Smaller businesses, however, face more challenging times ahead.

The financial lending institutions need to flow monies form Wall Street to Main Street. The credit markets are thawing and larger companies can once again qualify for loans. Qualifying for loans will allow the larger companies to calm their cash flow nerves. However, small businesses are facing increased scrutiny when applying for and renewing loans. Even with a high credit score and a large portion of collateral small business owners are having loans not being accepted or renewed. If the loan is not renewed the small business may not be able to raise equity and to take advantage of their local market conditions. Then loans are not renewed, small business owners are forced into repayment. A lot of small businesses and small business owners do not have the assets to repay the called loans. The cash outflow to repay the loan (if available) can potentially lead to a financial hardship for the small business by crushing liquidity, working capital needs and accelerate the cash burn rate. All of which make it more difficult to qualify for a loan from other lenders. These obstacles place more pressure on small businesses (even in a recovery). In additional small businesses will be forced into tougher lending standards which could potentially increase the number of small business failures at the same time the economy recovers for larger companies. Understanding this situation is important for small business owner because they can (immediately) begin to review their operations and focus attention on their financial position in order to take steps to strengthen their overall position before they request a loan or apply for a loan renewal from a financial institution.

Second, financial lending institutions currently are trying to figure out the new lending standards. The new standards are tougher than small business owners want them to be. Small businesses enjoyed the NINJA times (No Income No Job or Assets – no problem). Now small businesses feel they are being hassled at the time of the renewal since they have to provide accurate financial information and they understand the renewal is no longer guaranteed. The small business’s “hassle” is the increase of time involved and higher financing costs, including hiring a Certified Public Accountant (CPA) to issue financial statements and attend loan workout meetings. Financial lending institutions, however, have been faced with higher loan failures and are currently finding out the personal guarantees they had signed by the small business owners are semi-worthless. The small business owner protected themselves by transferring all of there assets to their spouse who did not sign the personal guarantee. This leaves the bank with a bad loan and a worthless personal guarantee. Banks may have both spouses sign the personal guarantee in the future for more protection. A troubling sign is a lot of small businesses and owners are not well capitalized (i.e. they do not have many assets, but do have debts and a good life style). As larger companies have built assets over time and made drastic cost cuts and lay offs of the work forces smaller companies have minimal assets and minimal liquidity and did not cut costs and work forces as quickly or dramatically as larger businesses.

Wall Street and the U.S. Government are lending to and bailing out Wall Street Companies, but Wall Street and the U.S. Government is not lending to or bailing out Main Street Companies. As larger companies are beginning to receive financing from financial institutions and bail out monies form the U.S. Government; small business lenders, such as CIT, have received little or no attention from Uncle Sam. CIT is one of the more important lending institutions for small businesses (The CIT Threat By Donna Childs). Small business lenders and regions banks seem to be hurting the most out of all of the financial institutions at the moment. In order for these institutions to lend monies to small businesses in the future they will have to increase their lending standards. For Main Street companies to qualify for loans in the future small businesses need to make major adjustments to their business model including building assets and overall strengthening the financial position of the business and owner (just as their larger counterparts have done).

Third, the economy is still in recession and growth will not be the glory days of the past. David Rosenberg, chief economist at Gluskin Sheff, stated “What matters is the contour of the recovery” (The Best Five-Month Run Since 1938 By Kopin Tan and Andrew Bary) meaning that the economy still has a long way to improve. The markets might have “improved” 50% between March and July 2009, however the business environment has not improved or not improved that considerably. Continued pressure on the economic recovery and growth over the next several years includes unemployment around 10% and increasing, the US savings rate has increased over the past 12 months, corporate America continues to de-leverage and the U.S. Government is too involved in private markets.

Unemployment of 10% and rising as well as an increase in the US savings rate places pressure on consumer spending due to uncertainty of future employment and income. Consumer spending at the local level directly affects small business performance. A reduction of consumer spending pressures the survival of small businesses. According to “The Recession is Over Now What We Need Is A New Kind Of Recovery” by Daniel Gross (Newsweek August 3, 2009) 5 million jobs are anticipated to be created by 2011, however the economy has lost 6.5 million jobs since December 2007. Consumer spending due to uncertain employment over the next several years can financially pressure local small businesses. As corporate America continues to de-leverage itself it repays debt instead of making purchases and instead of increasing its workforce. The reduction of purchases does trickle down to small businesses and less procurement can affect small business revenues. The U.S. Government involvement in large corporations should be more troubling than the news reports. Our pride as a market based economy and being a Democracy has been turned into the U.S. being Socialist without any major opposition. Yes, we are Socialists since the government owns private enterprise. As taxpayers complain that the government cannot do anything right or efficient at least. Now we are using more of taxpayer resources for Wall Street companies and not Main Street companies will have significant effect on Main Street’s future. Mr. Gross states it costs the U.S. government $92,000 in government spending or $145,000 in government tax breaks to create one job. The average job in the U.S. pays less 1/3 to ½ than this amount. The jobs created will first affect larger businesses, with hope that it will trickle down to small business. At least Main Street will still have its pride (even if it is forced into bankruptcy). Small businesses must be aware of this environment and understand the recovery has many challenges over the next several years to come.

In conclusion, small businesses have several challenges in the years ahead. Immediate action is necessary to continue to evolve their business model and strengthen their financial position. Business owners should expect to sacrifice more and potentially raise equity (diluting their ownership) in order to survive the rest of the recession and to try to stay alive through the recovery. Small businesses should continue to stay vigilant during the potential economic recovery in order to continue operations.

Personal Characteristics For More Explosive Business Building Success

The American dream is to be a successful business owner. Every year one million or more businesses start up but more than 88 percent of them fail within five years. Much of this failure is due to stagnant mindsets that are not forward thinking and willing to embrace change. The focus is on problems rather than solutions. The company becomes stuck because the leadership operates from a position of subtraction as opposed to multiplication or positive over negative. They are constantly reacting rather implementing strategies aimed at success.

So can you be a successful boss who can overcome the odds of failing in business? In order to succeed you need to do more than fantasize you need to develop desire, discipline and a high level of resourcefulness. Becoming skillful at what you do is important to your success.

The following are some indicators that may increase your odds of success in business.

A sound decision maker.

Decisions are the backbone of any business. Leaders who are skilled decision makers and take immediate action generally position themselves ahead of the curve. You must make decisions frequently and quickly. Making decisions while under the pressure of risks that could effect the business negatively is necessary.

A good decision maker thinks ahead and their best decisions are not those made in crisis but those made to push the business in unfamiliar territories that set it apart from the others.

A high level of self motivation.

Do you have a winning attitude despite the odds, rejection and the struggles of building a business? Do you embrace the challenges and find healthy competition fun? The passion and desire to be the best and to put in the work required to be number one is very important in business success.

A good solid variety of people skills.

Business requires relationships. Successful business requires positive and effective working relationships. There are a variety of people the boss must establish relationships with including staff,customers, vendors, bankers, partners, web designers, lawyers, accountants and the list goes on and on. Your ability to deal with these different people and personalities has a direct correlation on your business success.

A disciplined learner.

New skills and new technology are commodities in today’s’ business world. You must constantly learn to succeed in business by being able to make these advancements a part of your business. A working knowledge of management, accounting, planning etc. is essential to your success. Those who do not to learn and sharpen skills will fail.

Mental and Physical Stamina.

The ability to lead from the front requires strength and sound health. At times the leader has to be the first one in the office and the last one to leave. This is a prerequisite in to getting where you want to go. Business ownership is a lot of work. Can you work around the clock everyday to get the job done?

A self starter mindset.

It is up to you. All the responsibility of the business is on your shoulders. You have to follow through. If something does not get done it is on you. Managing time and meeting deadlines is one way to lessen risk. Taking personal responsibility to ensure things get done is up to you.

A high level of financial responsibility.

In business there are cycles that rise and fall. There are times of profitability and there are times of loss. Do handle money in a way that will maximize the revenues coming in? Can you establish a budget that will support you and your family as the business grows? Can you handle being the very last person to get paid? The way in which money is handled will determine if the company will reach a point of financial stability in the future.

A balanced work and family.

Business ownership creates a unique set of challenges that require a lot of compromise and understanding. There will be periods of financial problems as the business starts out . There will be a lot of time required out of the home. These are just a few of the strains that are put on the family. The key to getting through this is balance. The family must not become secondary to the business and the family must spend quality time together. The stress of building a business can be quite difficult and matters are complicated when there are unresolved family problems.

The ability to handle struggle.

You are all alone. There is no status, lucrative benefits and salary in the beginning stages of building a business. There are many sacrifices and struggles that must be made to build a successful business. Struggle is a part of the success process. Those who navigate it properly generally fine tune the skills they need to succeed.