Why Should I Use A Business Broker?

You've come to the decision that buying a business or selling your business is the path that you want to take. The best piece of advice, although biased, I can offer is to retain the services of a business broker or business transfer adviser. Although business brokers usually work on behalf of the seller, there are sell-side business brokers and buy-side advisers. Even if you're a buyer and you decide not to retain the services of a business broker or transfer adviser, you'll receive the benefits because a business broker is working with the seller.

The broker is sort of like a clamp that holds things together as the business buyer and seller progress through the business transaction. Below I'm going to explain to you how both business seller and business buyer can and will benefit from the services of a business broker:

Let's meet-

The good thing about the business broker is, the profession requires face to face meetings. Even though the broker is getting paid by the business seller, the buyer has to meet with the broker in order to view the business as well as so the broker can determine if the buyer is a compatible buyer for the business.

The meeting will be an interview style meeting. Some of the questions that will be asked by the broker are:

1- Can you go into detail about your background?

2- Have you ever purchased a business

3- Do you have easy access to the cash to buy a business?

4- Can you show proof of proceeds on a recent bank statement?

5- How soon are you willing to make a purchase?

In addition to the question and answer portion, you'll also be given a personal financial statement to fill out and return. Be sure you return this information as soon as possible.

What usually takes place after this meeting is, the business broker will than present compatible business to the buyer. So come prepared with a recent bank statement showing the cash. Time is of great importance. Strike while the fire is hot and move with swiftness.

Expect for the broker to ask you to sign a non-disclosure agreement. The business seller wants to ensure that the word about the business being for sale is kept quite.

As the buyer, you'll get to see very general financial information about the business of interest and others in the business broker has other businesses available. If you decide that you have serious interest in any of the businesses that are presented, the broker will provide you with more in-depth financial date and also arrange for you to see the business in person.

The broker will act of the best point of contact for the buyer. Any questions or concerns that the buyer may have, the broker can answer all questions concerning the business.

How the business broker helps the seller-

If you're the owner of a business and you've decided to sell, one of the best services that you can retain are the services of a business broker. The broker will oversee the entire process while you continue to run your business.

The business broker will interview all of the buyers. This service by itself is worth the broker fee. Business brokers usually have access to a database of buyers that they've acquired over the years. These are buyers that have identified themselves are compatible and financially capable of buying a business. Having access to a list of buyers will speed up the process and help get the business sold while it's still "hot."

The business broker will especially prepare a marketing plan for the business in question. A sales prospectus will take time to prepare but your broker will provide you with this required document. In addition, the broker will structure the deal as well as assist the completion of the paper work.

Many owners don't know how much their business is worth, therefore the broker can assist you with pricing your business. Te pricing of the business is just a starting point. The buyer will get an official appraisal. Between the 2 numbers, the negotiations will start there. Also, you want to ensure that your business is properly priced. You don't want it to be overpriced not under priced A business that is priced right WILL SELL. The ultimate price of the business will be determined by what it sells for or as brokers like to say-the marketplace.

Top 3 Reasons Small Businesses Fail

Before You Say "I Do"

Before you say I do, before you make the investment, before you hang the sign, before you set up the company, there is something that you should know. Small businesses are similar to a marriage - no one goes into the venture thinking that it won't work out. Yet a significant portion of small businesses fail. According to the Small Business Administration, as many as 30 percent of small business startups fail within the first two years of the honeymoon - and up to 50 percent within the next three years. Do the math and you'll come up with a staggering 80 percent failure rate among small businesses within the first five years. The odds are stacked against you, but our business model is based entirely on helping small business owners maximize growth. To avoid the pitfalls that cause other businesses to fail, you've got to understand what business failure is, the reasons why small businesses fail and what it will take to be part of the remaining 20 percent that achieves success.

Just like someone whose marriage has ended in divorce, failed small business owners often blame anyone but themselves. They look for factors outside their control as scapegoats for the downfall of their business endeavors. They blame the economy, the government, their partners or their employees, just to name a few. If you dig a little deeper, the real root of the problem can often be revealed in a lack of business acumen, inadequate resources or insufficient capital. Without exception, these issues are ultimately the responsibility of the small business owner.

Lack of Business Acumen

Making the transition from an employee to a small business owner can be extremely difficult. The disciplines that you have developed as an employee are totally different than what you will need when you step into the owner's shoes and start running the show. The reality is that many owners' expertise lies in accounting, law, medicine or some other discipline unrelated to day-to-day operational concerns. Don't assume that you can just open a business and find clients or patients lining up outside your door. It takes skill and experience to drive business your way. Identify the areas where you lack expertise and look for consultants, partners, professional services or employees to fill in the gaps.

Inadequate Resources

For small business owners, relationships mean everything. The right relationships result in a strong foundation, but incompatible or incomplete teams translate to inadequate resources. What team resources can you leverage to balance your own strengths and weaknesses? Too often, new business owners attempt to do it all themselves. This strategy may work in a one-man operation for someone whose goal in life is to only work by himself, for himself. Unfortunately, it's an ineffective strategy for running a full-scale business. Instead, you need the right team and the right advisors. One of the most powerful tools you can use to increase your chances of success is to learn where to turn to get the right resources to fit the needs of your business. That won't necessarily mean consulting with your best friend or hiring a former co-worker. Your selection process should extend beyond friends and family. Looking for the lowest price may also not be the best decision-making criteria. The truth is you get what you pay for. Locating and utilizing the best resources possible is one of the keys that will differentiate your future between dissolution and success.

Insufficient capital

The number one reason why marriages fail is because of money issues, and small businesses are no different. The amount of capital available to you at the time you establish your new business is a critical determinant of the success or failure of your business. Simply put, your available capital is the sum of your cash, lines of credit or trade credit for the business. For most start-up businesses, the costs incurred within the first two years far outweigh income - except in the case of acquiring a business that provides income on day one.

One of the largest and most common problems is muddying the line between business expenses and personal expenses. Separate your personal life from the business. Resist the temptation to remove cash from business accounts to satisfy a shortfall in your personal budget. While it's true that the business should provide income to the owner, too-frequent personal withdrawals cause undue hardship. Plan withdrawals that are sufficient to maintain your household needs and stick to the plan.

Valuing a Business for Sale - An Imperative Guide

I often get asked for a "rough idea" of what a business is worth.

It's an interesting question, but not one that can be answered in any meaningful way without drilling down into the specifics of the business because in the real world, the valuation of a business has many variables including industry types, differing market sectors and individual levels of profit and risk that make any 'prophecy' of business asset valuation as reliable in outcome as taking a trifecta bet at a race track.

This is particularly true in relation to a privately owned small business valuation whether the business is incorporated as a private company or operates as a sole trader.

Apart from their annual Tax Return, privately owned businesses in Australia, are not obliged, to lodge financial reports with any statutory body or publish any details of their activities in the public domain.

With publicly listed entities (companies listed on a stock market) there is more data for a business valuation company to analyse in the form of share prices, price to earnings ratios, historical performance and annual reports. Comparisons can be made between these indicators to determine a range of valuation metrics.

Private businesses, however, are as different as fingerprints - no two businesses are the same because they are generally 'built' around the needs of the business Owner. Business analysis and valuation of private businesses must therefore, in addition to a study of the financials, include a detailed Risk Assessment and take into account the Return on Investment that the business makes for the Owner and the Cost of Capital to buy the business.

What to Look at When You Want to Value a Business for Sale?

Commonly, many SME (Small to Medium Enterprises) business asset valuations focus on the 'Return on Investment' (ROI). This is usually expressed as a percentage (%) and is a measure of the Risk to an Owner versus the Return. For a privately held business in Australia this should be between 20% and 50%. The closer to 20% the more 'secure' the business investment - the closer to 50% the more 'riskier' the investment.

A business valuation report that demonstrates a ROI under 20% indicates that it would be unlikely to generate an investment (or a Bank would not lend the funds to purchase) - quite simply the return would not be enough (because of the liquidity - or ease of conversion to cash) to warrant the investment and a return of over 50% would indicate that there are significant risks which would be outside of the comfort zone of most investors and financiers.

As a general rule, private businesses and the valuation of companies in the private space tend to be based on historical financials with the valuation of intangible assets based on the adjusted net profit (before tax) - called EBIT (Earnings before Income Tax)

Adjustments are made to the Accountant prepared financials to 'add back' any expenses to the business profit which are discretionary to the owner(s) personally, plus 'book' expenses like depreciation of P&E and any abnormal 'one off' expenses like a non recurring bad debt to arrive at the real Net Profit (before tax) of the business.

It is multiples of this Net Profit, tempered by the Risk profile of the business and the ROI percentage which will determine the Value of the business.

But whilst most people ask for a private or corporate business valuation, what they really want to know is the PRICE.

Value and Price can be two very different numbers.

What is the Difference between 'Value' And 'Price' when You Want to Value a Business for Sale?

In the valuation of companies where the reason for the valuation is for the re distribution of shares for a Management Buy In, the price conclusion must relate to the market (is the sales market for this type of business up or down?) so that a base price can be determined at that point in time even though there will be no actual "sale" of the business.

Similarly, in business valuation for divorce where there could ultimately be an external transaction to sell but in some cases one party wants to retain ownership of the business and buy the other party out. In this case both parties want to know the 'Fair Market Value' of the business so they can settle even though the business is not actually being sold.

In essence, 'Value' can be entirely based on hypothetical theory whereas 'Price' in the true sense can only be based on "what the market will pay".

Paul Nielsen is a graduate of Chicago's Loyola University School of Business Administration and is a Certified Mergers and Acquisitions Advisor (CM&AA).

He holds qualifications in Australia as a Certified Practicing Business Broker (CPBB) from both the REIQ & AIBB, is a Certified Machinery & Equipment Appraiser (CMEA), Licensed Real Estate Agent, Licensed Second Hand Dealer and Accredited Sponsor of the Australian Small Scale Offerings Board.

When Starting A Small Business

Starting a business has been an integral part of the American dream for hundreds of years. This is the segment of the business world that has helped this country grow during its infancy, and it has been a mainstay in helping to keep the American economy afloat ever since. With all of the changes that all of this growth during the years has brought, the most important thing a person needs when starting a small business is knowledge. The amount of training and assistance that is available is staggering to say the least. What you need is to focus on what type of business you plan on operating, and find the assistance and training that is applicable to that field.

The time involved to get trained will depend on the type of business you want to have, and whether you plan on having someone train you or you plan on training yourself. Either way, you want this to be comprehensive in that it should cover everything from starting your business, maintaining it and then possibly selling it out when you want to retire. Everything involved may seem overwhelming at first, but it will all be worth it when you see the success starting to overtake the hard work you put in to make it a success.

The training you get and any assistance that comes with that training is going to be the foundation on which your business is built. From here, what you will need to get is a business plan. You can keep the plan in your head and just do it, or you can write it down in a professional manner. The latter of those 2 options is preferable for at least 2 reasons. One, having it all written will keep the ideas you have fresh for years to come. Your business, be it large or small, is going to be complex because it involves so many things. From where the business is going to be, how many employee's you plan on starting with, advertising, marketing, and the list goes on.

The second, and possibly most important reason, is that a professionally written business plan is key to getting a loan to help get your business up and running. Now, if you have your own capital this isn't going to be necessary. Nor would writing down your plan for the purpose of securing a loan, but again, writing down your plan is beneficial. There have been many times when people start their own business with certain things in mind, only to have those certain things change in time. The business world can be very fickle and your own plans may have to change to keep up with the external changes that have a direct or indirect influence on your business.

Having all of the applicable business licences is a legal necessity and something you definitely need to plan on getting. The reason this fact is being pointed out after the financial aspect is that some people tend to put the cart before the horse. Securing a loan is typically not contingent upon having the required licences to legally operate the business. However, getting the required licences would be pointless without the cash to get the business up and running. If need be, if the licensing procedures are costly, you can always take out 2 separate loans. One to get the licensing you need, and then when that is taken care of, secure a second loan for the business itself. With small businesses though, this is typically unneeded as many licences can cost as little as ninety-nine dollars.

Once you have the capital and the legal obligations taken care of, you need to come up with a name for your business and register that with the state where the business is head-quartered. When starting a small business this is kind of a no-brainer because you, typically, will only have one location. Some people though, when starting out, will have their main offices in one state while having another portion of the business, like a distribution centre for example, in another state. With this being the case, you need to register your business name in the state where the business originates from.

Your business name needs to be filed for the obvious legal reasons, but it also needs to be filed because it would be rather hard to advertise and market your business without one. Hopefully, this aspect of your business is a part of your plan because, without it, no other part of your plan is likely to work. This should also be a part of the budget that was included in your start-up loan. The main reason new businesses fail is because they fail to get the word out. Focusing on the best ways to do this should have been a part of the training you received at the outset.

Adding to these musts when starting your new business, is to actively retain legal advice. You will want to do this to get advice on contract and documents, as well as ongoing consultation and representation as you build and protect your business. One way to do this, without enormous cost, is to purchase a small business legal plan. You can usually find one that will provide the essentials for a start-up business, as well as ongoing advice as your business matures.

Aside from the training, the business plan, the loans, the licensing, and the small business legal plan, perhaps the most important thing you need to start your own business is patience. The old parable about the tortoise and the hare is true. Especially in the business world. No one gets rich quick, at least not legitimately, so slow and steady really does win this race. The rule of thumb to go by is to expect to be in business for 5 years before turning enough of a profit to live comfortably on. This is why many financial institutions that give out loans to small businesses like to see a 5 year plan. They know as well as anyone that 5 years is typically how long it takes to turn a liveable profit.

If this all sounds like a lot of work, well, it is. But with education, planning, organization and patience it doesn't have to be hard. The rewards of owning your own business and being your own boss far outweigh the time and effort it took to become successful. There are many places online and, you can go to get testimonials from people who have "been there, done that", and succeeded. I wish you good luck and much success with your new business.

Your Business Can Access Working Capital

The number one reason that businesses fail is due to insufficient capital (they run out of cash). According to Bloomberg 8 out of 10 business owners fail within the first 18 months. Another 50% fail in the first 5 years. Other reasons businesses fail include; lack of experience, bad location, entering over saturated markets, over investment in fixed assets, unexpected growth and poor credit arrangements. Let's add one more to the list; not knowing where to go to access working capital.

Most businesses owners invest their own personal money to keep the business going. Some will go to friends and families. Some will try the bank. But if you don't have a lot of assets to pledge, a proven track record, a good credit rating or are not yet profitable, the chances are the bank is going to turn you down. So where do you go to get a loan to take your businesses to the next level?

There are private companies that will provide a loan to a business that has daily cash flow, as long as some basic requirements are met. A business owner does not have to pledge assets or have a great credit rating. There are viable financing alternatives, to receive business funding that are not considered loans. Business funding programs do exist where you are not required to pledge assets, have great credit or a long proven track record. A word of caution, do not expect to get the same rates you would get from a bank. These private lenders are taking on more risk than a bank, so a higher return on their investment is expected. Some of the available business financing options include, a Merchant Cash Advance, a Small Business Loan, Purchase Order Financing, Invoice Factoring and Supply Chain Financing.

Merchant Cash Advance

If your business accepts credit cards and debit cards there is a program called a Merchant Cash Advance that has very high approval rates. A business owner does not have to sign personally or have good credit. A Merchant Cash Advance is not a loan but rather a purchase of your future credit card / debit card receipts. The advancer will buy a future amount of credit card receipts / debit card receipts at a discounted rate. A small portion of a businesses daily sales will be taken by the advancer until the amount is re-paid. Typical payback is 6 to 10 months.

Small Business Loan

There is a small business loan available for business owners. The lender is more concerned about a company's daily cash flow then about credit ratings and the ability to pledge assets. The business owner does not have to sign personally. This small business loan has very high approval rates, with some basic requirements for funding. The lender will take a small fixed amount of daily sales until the loan is repaid. The term of the loan is one year.

Purchase Order Financing

Has your business been working on landing a large contract? Congratulations you just received that long awaited purchase order. As you admire your new conquest you see some small print with the words Net 30, 45 or 60. Your business may have a cash flow issue. Vendors and payroll may have to be paid before you receive payment from your customer. If your business does not have enough available working capital or access to working capital to wait to get paid before you have pay your vendors and staff then what do you do? If your purchase order is from a reputable company then your business may be able to receive a cash advance against that purchase order. The purchase order itself is a legal agreement to purchase a product or service from your company. A lender will know that the customer will pay as long as you fulfill your end of the contract and advance you enough money to ensure you meet your contractual obligations. A lender will be concerned with the customer's ability to pay, and your ability to fulfill the contract. They will not be as concerned about a businesses credit rating or the pledging of additional assets.

Invoice Factoring

A company can be profitable and still go out of business due to poor cash flows. What a profound statement. A cash flow gap can be created when a customer pays slower than a company has time to pay its employees and vendors. The company is waiting for customers to pay before it can pay its own expenses. This can be a very serious situation and cause a profitable company to go out of business. Fortunately there is an alternative financing solution called Factoring of Invoices.

Factoring invoices is a business financial transaction where by a business sells its accounts receivable (invoices) to a lender (factoring company) at a discount. For this type of business financing there are three parties involved. One is the company that provides the service or goods to the customer, two is the factoring company that will provide the company with an advance, and three is the end customer that received the goods or services. When the company provides goods or services to the end customer an invoice is created. That invoice is then purchased by a factoring company at a discount. The factoring company will advance the company a large portion of the value of that invoice.

The end customer will then pay the factoring company directly the value of the entire invoice. When the end customer pays the invoice, the factoring company will send the remaining amount of the invoice minus a small fee to the company that factored the invoice. Consider the following scenario: A company completes a service or sells goods to an end customer that typically takes 30 days to pay. Almost immediately after the transaction happens a factoring company will advance the company a large portion of that invoice. The company now has most of its funds available, almost immediately, to pay it's suppliers, complete payroll or what ever else they would like to do with the funds. Once the end customer pays the invoice the remaining amount is forwarded to the company minus a small fee. Factoring of invoices can help out tremendously with cash flows, especially if a company is in a growth period. Factoring companies are not as concerned about the companies credit rating as they are more concerned about the customers ability to pay.

Reverse Factoring or Supply Chain Financing

This method of business financing is much like invoice factoring. The difference is, traditional factoring is when a supplier chooses to factor the invoices to their customers but with reverse factoring or supply chain factoring, the customer initiates the factoring to help their suppliers to finance their receivables. Reverse Factoring or Supply Chain Financing can be an effective way to improve your cash flows. The benefit to both parties is that the company providing the goods or services can get the outstanding value of their invoices paid very quickly and the ordering company can delay the payment of the invoices, thus improving their cash flow position.